There are many variables in place when it comes to applying for home mortgages. You and your neighbor might both decide to purchase homes that cost about the same, but end up getting two completely different mortgage offers. Home loans vary in terms of length, interest rate types, and even who is guaranteeing the loan or what the requirements are for a borrower. If you don’t think one type of mortgage is the right fit for you, it might turn out that another type is.
Type of Interest
When it comes to interest rate options, there are three basic types of home mortgages. A fixed rate mortgage is perhaps the most easy to understand. Your interest rate will stay the same throughout the life of the loan. If you are paying a 4.5 percent rate in year one, you’ll be paying a 4.5 percent rate in year 10, year 15, and so on, until the loan is paid off. In contrast, if you get an adjustable rate mortgage (ARM), the interest rate can change over the course of the loan, based on changes in the market. An ARM might initially offer a lower rate than a fixed rate loan, but if interest goes up, your rate will go up when it’s time for the loan to adjust. The opposite is also true: If rates fall, you can end up paying much less on your loan if your rate goes down.
Another option is an interest only mortgage. If you have this type of mortgage, your payments cover just the interest on the loan, not the principal, for a set amount of time. Once that period is over, you might have to pay the full amount of the loan right away or start making payments that include interest and principal. An interest only mortgage is usually considered to be pretty risky since you aren’t actually paying down the loan for some time, and because the amount you need to pay monthly can increase.
Length of the Loan
Along with offering different interest options, home loans can vary when it comes to the length of the loan term. Some mortgages might have terms of just five or 10 years, meaning you make payments on a schedule that pays the loan off in full in that time. More common loan terms are 15 years or 30 years. A 30-year mortgage tends to be the most popular, according to Bankrate. With a 30-year loan, you are paying the mortgage back for a longer period and will most likely pay more in the end, but you also pay a lower amount every month.
Usually offered to people who don’t qualify for a conventional or traditional home loan, a guaranteed mortgage has a third party offering to cover some or all of the loan if a borrower defaults or stops making payments. One type of guaranteed mortgage is a loan from Veterans Affairs, which is available to people who have served in the armed forces. If a person qualifies for a VA loan, he or she doesn’t have to put anything down. The Federal Housing Administration also offers a guaranteed mortgage program, for people who might not have the best credit or who aren’t able to put a lot down. Both programs require you to pay for private mortgage insurance.
The type of mortgage you decide to get determines how much you pay over time and how much you pay upfront. Although some mortgages cost more in the long run, they might be a better fit for you now.
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