Mortgage and Home Loan Varieties in a Nutshell

There is a mortgage or home loan for just about anyone

The market for housing in the United States has been astonishing during the last five or six years as some cities have seen the prices of housing triple during that time. In some places, such as California or the East Coast, this has made the price of a home nearly unaffordable for many working class and middle class people. Fortunately, the always resourceful mortgage industry has a wide variety of home loan products designed to help just about anyone purchase a house.

If you are new to the home buying business, the different types of loans can be confusing. Here is a short list of the most popular types of mortgage products, along with their good and bad points.

• Fixed-rate mortgage - At one time, this was THE mortgage. You didn’t choose from a variety of mortgages, you just got one of these. This one is simple - you agree to pay for a set amount of time, usually 15 or 30 years, and you pay a set rate of interest that doesn’t budge over the life of the loan. These are great if you know that you are going to be in the house for a long period of time and/or if the interest rates are low when you apply. They are not such hot products if interest rates are high, as they were in the late 1970’s and early 1980’s. If you are going to be in the house for less than five years, this may not be your best mortgage choice.

• Adjustable-rate mortgage (ARM) - These come in a wide variety of types, but in general, this type of mortgage begins with a fairly low interest rate that will adjust over time to a higher rate.  The lower rate, the upper rate, how much the rate can move over time, and how long each of the rates can apply are flexible and can vary by lender or by need. This is a good choice if you are going to be in a home for a short period of time or if you are just starting out and don’t earn a lot of money but expect to have salary increases down the road that will allow you to make higher payments later. Often, an ARM can have a much lower starting rate than a fixed-rate loan, but at the moment, there is less than a 1% difference between the two.
• Interest-only mortgage - These loans have a set period of time during which the payments cover only the interest that accrues on the loan, but not any of the loan principal. During this time, the mortgage payments will not help the owner build equity in the property. These are best suited for people who are certain that they will be living in the house for only a short time. Many people have been taking these mortgages in areas with high value appreciation; it allows them to accrue equity i their house while still paying only a nominal house payment. This could be a risky choice if housing prices flatten or fall, as the payments do not reduce the loan amount for several years. Once they do, the monthly payments will increase substantially.

Each homeowner has a different need, and lenders tend to offer products that will suit just about anyone. If you are not sure which works best for you, consult with a lender.