A wide selection of mortgages is currently available. The challenge is to select the loan terms that are most favorable to your situation.
Traditionally the most popular type of mortgage, borrowers enjoy the comfort and security of a fixed rate and payment. Longer term fixed rate mortgage loans, like the traditional 30-year fixed rate loan, offer the most affordable fixed rate option. This mortgage loan may be ideal if you plan to remain in your home for years. Shorter terms, like the 15-year fixed rate loan allow you to build equity in the home faster and save interest expense.
With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted periodically to keep it in line with the changing market rates. This means when interest rates go up, your monthly mortgage payments may go up as well. On the other hand, when interest rates go down, your monthly mortgage payments may also go down. ARMs are attractive because they may initially offer a lower interest rate than fixed rate mortgages. The chief drawback is that your monthly payments may increase when interest rates rise.
You may want to consider an ARM if: your income will rise enough in the coming years to comfortably handle any increase in payments, you plan to move in a few years and therefore are not concerned about possible interest rate increases, or you need a lower initial rate to afford the home you want. A typical ARM will adjust annually, have a yearly cap on interest rate increases of 2%, and a lifetime rate cap of 6%. The interest rate changes on an ARM are always tied to a financial index, such as the average interest rate on Treasury bills.
You may want to consider a special type of ARM that does not adjust your interest rate until several years after you take out the loan. You can get a three-, five-, seven-, or ten-year fixed period ARM. This means your interest rate would be the same the first three, five, seven or ten years and then, at the end of your chosen fixed rate period, the interest rate would adjust every year. This type of mortgage generally starts with a rate lower than standard fixed rate loans, and protects you against rapid interest rate increases in the early years of the loan.
The Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) are agencies that offer government-insured loans. To obtain these loans you apply through a lender that is approved to handle them. With FHA loans, you can purchase a home with a very low down payment. FH mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region. The VA guarantee allows qualified veterans to buy a house costing up to $203,000 with no down payment. Also, the qualification guidelines for VA loans are more flexible than those for either a FHA or conventional loans.