The mortgage world can be very confusing. Every mortgage has variables that determine how much a borrower ends up paying.
Before you begin your purchase, take a look at the different types of loans available today and which one are you most likely to benefit from.
30-year Fixed-Rate Mortgage
This mortgage combines a stable, fixed interest rate with a long loan term that helps create manageable payments for millions of people. During the years leading up to the current mortgage crisis, many homebuyers strayed from this in search of loans with lower interest costs. Today, many borrowers are returning to the 30-year fixed-rate way.
This is best for borrowers who plan to remain in their homes for a long time and/or who want the security of knowing their monthly payment will never change.
30-year Jumbo Mortgage
Jumbo mortgage loans are 30-year fixed-rate loans too big to be bought and repackaged by mortgage giants Freddie Mac and Fannie Mae for resale to investors. Banks that issue jumbo mortgages have to hold onto the debt themselves.
As a result, jumbo borrowers can expect not only a higher interest rate on their loan, but also have more difficulty finding a lender.
Jumbo loans are best for buyers who want large, expensive or midrange homes in areas of where housing is more expensive.
One-year ARM
ARM stands for adjustable-rate mortgage. Unlike fixed-rate mortgages, these loans don’t have a rate guaranteed to remain stable for the duration of the loan. The introductory rates on these loans, which last only for the first year, often are significantly lower than rates on fixed-rate loans. The term for these types of loans are usually 30 years.
After one year, the interest rate and the monthly payment, adjusts periodically based on a mortgage index such as the Libor (London Interbank Offered Rate) or COFI (11th District Cost of Funds Index). In a falling-rate environment, that’s a good thing, as it results in lower payments. However, if rates increase, you’ll have higher payments.
ARM’s are good for buyers who don’t plan to stay in their homes very long and who are looking for lower borrowing costs.
5/1 ARM
The 5/1 ARM is an adjustable-rate mortgage that has a fixed rate for five years. After that, the rate adjusts periodically. Buyers benefit from lower borrowing costs when interest rates fall, but get stuck with higher payments when interests rise.
5/1 ARM are for buyers who intend to sell within five years and are looking to cut down on their mortgage costs.
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