Santa Clarita Real Estate, Santa Clarita Luxury Homes, Valencia Real Estate, Westridge Real Estate

Types of Mortgages 

There are several types of mortgages from which to choose. The qualification criteria vary widely and you may not qualify for every type.  It’s in your best interests to investigate each kind to see what best fits your needs and financial situation and to discuss the various options with your mortgage lender or broker. 

Basic types of Mortgages: 

• Adjustable Rate Mortgages (ARMS)
• Convertible ARM
• Fixed Rate Mortgages (15, 20, and 30 year)
• Balloon Mortgages
• FHA or VA (Government loans)

Adjustable Rate Mortgages (ARMs) 

Adjustable rate mortgages are likely to offer a lower interest rate, at least at first, than a fixed rate mortgage. You would consider an adjustable rate mortgage if you don’t plan on staying in your home for more than a few years, the interest rates are currently high, if you are comfortable with a varying mortgage payment, or you anticipate an increase in your income. Since adjustable rate mortgage interest rates are tied to specific financial indexes, such as the Certificate of Deposit Index, the LIBOR, or Treasury or T bill rate, the interest rates will rise of fall with these indexes. As the interest rates rise or fall, so will your mortgage payments. Fortunately, there is a cap on the amount the lender can raiser your interest rate any given year, or over the life of the loan – ask your lender what the cap is and make sure you understand this type of mortgage. 

Convertible ARMs 

The Convertible ARM is attractive if you don’t plan on staying in your home long term, for instance, if you are frequently transferred in your job, or if the current interest rates are high. This blend of an adjustable rate for the initial 5 or 7 year period, and a fixed rate for the remainder of the term is desirable to some consumers because you have the benefit of a lower rate at first, then you have a predictable interest rate thereafter. The downside is that initially, your payments could fluctuate and your payments increase before that fixed rate kicks in. 

Fixed Rate Mortgages 

The fixed rate mortgage interest rates are often somewhat higher than some of the other options.  The benefit of this type of mortgage is that you have the same interest rate throughout the life of the loan.  It is often chosen by consumers if they plan on keeping their home for more than 5 -7 years or if they anticipate their income to remain about the same throughout the life of the loan. It’s desirable for those who prefer not to have their payments fluctuate with the market.  The downside is that you would not have the benefit of your mortgage payment decreasing should interest rates fall. 

15 Year Fixed –

With a 15 year fixed mortgage, you pay off your home in half the time you would with a 30 year mortgage, saving you thousands of dollars in interest, and the equity in your home will build up much faster.  The payments will be significantly higher, so you would want to make sure your financial picture for the next 15 years is stable enough to afford the higher payments if illness or a job loss should occur.

20 Year Fixed –

This would be a good option if you can afford the higher payments. The payments would not be as high as that of a 15 year mortgage, but you would still save thousands of dollars over a 30 year mortgage and build equity in your home faster than if you had a 30 year mortgage.

30 Year Fixed –

The easiest of the three to qualify for, the 30 year mortgage is the most commonly used. The payments will be much smaller than a 15 or 20 year fixed mortgage, but of course the equity would build up a lot slower since more of each payment will go towards interest rather than principal for the first few years.  You would consider this loan when there is not a lot of financial cushion between the mortgage payments and the amount you are comfortable spending and when you plan on keeping your home for a long period of time.

Balloon Mortgages 

A balloon mortgage is basically a fixed mortgage with a shorter term of 5-7 years, at the end of which you need to pay off the balance.  Again, this type of mortgage is most often chosen by those who don’t plan on staying in their home longer than the short term. The benefit of this type of mortgage is that you still have the same interest rate throughout the loan and the interest rates are usually lower than the traditional fix rate mortgage, and therefore the payments are lower.  The downside to this type of mortgage is that if you want to remain in your home longer than the initial period, you’ll need to refinance the home at the going interest rates. Therefore this option may not be the best for you if you prefer to avoid the possibility of having to refinance at a higher rate after 5-7 years.

Government loans (FHA and VHA) 

The Federal Housing Administration and the Veterans Administration will offer loans through certain lenders.  If you are a veteran, or wanting a lower priced home with a lower payment, you will want to check on the availability of this type of loan.  The benefits are that often the FHA or VA loans would require a smaller down payment, and the loans are insured by the government.  The disadvantage is that these loans are limited to only certain properties that are designated as approved for FHA or VA loans.

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copyright © Michael Feicco 2006