Types of Mortgages: What’s Best for You?
Homeownership has been part of the American dream for decades. There are two fundamental questions to ask when buying a home:
- What can I afford?
- How will I pay for it?
Help for First Time Buyers
There are a number of options for first time buyers, depending on the amount of money available for a down payment and monthly income. Federal Housing Administration (FHA) loans basically provide back up assurance to the lender that the buyer will not default on the loan. Veterans Affairs (VA) loans provide assistance for veterans, which may or may not be helpful, depending on market rates.
Types of Mortgages Available
Mortgages are generally divided into two types:
- Fixed Rate Mortgages (FRM) where the interest rate is paid on the principle amount of the loan, and is locked based on the rate at the time the loan is secured.
- Adjustable Rate Mortgage (ARM) with an interest rate that fluctuates within a given range, depending on current interest rates
There are a number of variations on these types of mortgages including:
- Graduated Payment: payments start low and rise over time
- Option Payment: there are several payment levels available
- Balloon Payment: payments are low for a time, and a large payment is due at pay off
- Bi-monthly Payment: one half of the mortgage payment is made every two weeks, resulting in an extra month's payment made each year
- Shared Appreciation: offered by a number of U.S. cities, a second mortgage with no payments or interest paid for 5 years
- Dual Index Mortgage: common in Mexico, payments are based on one's income, and adjusted accordingly
- Wrap Around Mortgage: the lender assumes responsibility for an existing mortgage
- Interest Only: the buyer pays only interest for a period of time, with a larger payment due at a later date
- Simple Interest Mortgage: computes interest daily, rather than monthly, so paying one's mortgage before the due date saves money
- 80/20 Loan: involves taking out two mortgages—a first at ten percent down, and a second, also at ten percent down.
Deciding What's Best
There's no getting around it, when buying a home, it has to be paid for—sometime, somehow. The way it is paid for is between the buyer, the lender, and perhaps a mortgage broker, someone who will help find the best mortgage for the situation of the buyer.
Some Questions to Ask
Here are some questions to ask before choosing a mortgage plan:
- How much money is available for a down payment?
- What is the maximum monthly payment? (Based on income, assets, etc.)
- What length of mortgage is best? (15 years? 20 years? 30 years?)
- How long does one plan to keep the property?
- Is the purchase being made for a residence or for income property?
- What are the possible tax advantages of a given mortgage option?
The answers vary depending on financial status, earnings, age, and the long term lifestyle and financial goals of the buyer. In sum, despite the fact that buying a home means spending a great deal of money, there are many ways to adjust the monthly amount paid to fit one's short and long term circumstances. Before making a decision, it is well to consider all the pros and cons of each option, and to get professional advice if they seem too complicated.
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