Fixed-rate mortgage loans

The interest rate may be your main consideration if you expect to stay in, your house for a long time. With a fixed rate mortgage, you can be sure that your interest rate will stay the same for the entire life of your loan. Fixed-rate mortgages are available in a variety of repayment terms, with 15, 20, and 30 years the most common.

30-year fixed-rate mortgage loan

The easiest fixed-rate loan to qualify for, the 30-year mortgage gives you an excellent opportunity to keep your mortgage payments over a long period of time. This mortgage loan may be ideal if you plan to remain in your home for years and wish to keep your housing expense low and use any extra cash for other purposes.This loan also provides maximum interest deduction for tax purposes.

20-year fixed rate mortgage loan

The 20-year mortgage gives you the opportunity to own your home free of debt much sooner than the 30-year mortgage loan. It often offers a lower interest rate compared to a 30-year loan. This mortgage amortizes principal and interest over a 20-year period, 10 years less than the traditional 30 mortgage. This may save you, a considerable, amount of total interest paid over the life of the loan.

15-year fixed rate mortgage loan

The 15-year mortgage offers a lower interest rate than a 30-year or 20-year mortgage. Such a shorter-term mortgage will save you a significant amount of interest over the life of the loan. By paying off the loan mortgage more quickly, you also build up equity in your home sooner.  A 15-year mortgage can let you own your home clear of debt earlier, which -may be important if you are approaching retirement or have other large expenses to -Cover such as financing your children’s education. However, the monthly payments you make on a 15-year mortgage cost you more than those, you would make on a 30-year or a 20year mortgage loan for the same total mortgage amount.

Adjustable-rate loans

With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted from time to time to keep it in line with changing market rates. This means that 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. Since the monthly payments on an ARM start out lower than those of a fixed-rate mortgage of the same amount, you can for a larger loan. The chief drawback, of course, is that your monthly payments may increase when interest rates go up. You may want to consider an ARM if you are confident your income will rise enough in the coming years to comfortably handle any increase in payments. You may also want to consider an ARM if you plan to move in a few years and therefore are not so concerned about possible interest rate increases. You may also want to consider an ARM if you need a lower initial rate to afford to buy the home you want. How much your payments can increase will depend on the terms of your mortgage. Before applying for an ARM, be sure you know how high your monthly payments could go – the so-called "worst-case scenario." An ARM has two 'caps' or limits on how large an interest rate increase is permitted. One cap sets the most that your interest rate can go up during each adjustment period and the other cap sets the maximum total amount of all interest adjustments over the life of the loan. A typical ARM that adjusts annually, for example' may cap the yearly interest rate increases at 2 percent, meaning that the adjusted interest rate can never be more than 2 percent higher than the previous year. And such an ARM may have a lifetime rate cap of 6 percent, meaning that the highest adjusted interest rate you can ever be required to pay is no more than 6 percent above the original rate. So, if you are looking at an ARM with a current introductory rate of 5 percent, a lifetime cap of 6 percent tells you that the highest interest rate you could ever pay would be 11 percent. Only you can determine if you would feel comfortable paying this interest rate sometime in the future. Some ARMs offer a conversion feature, which allows you to convert from an adjustable-rate to a fixed-rate loan at only certain times during the life of your loan. Ask your lender about this feature when researching ARMS.

One important thing to know when comparing ARMs is that the interest rate changes on an ARM are always tied to a financial index. A financial index is a published number or percentage, such as the average interest rate or yield on Treasury bills.

The Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the Rural Housing Services (RHS) are three agencies that offer government-insured loans. To obtain these loans, you apply through a lender that is approved to handle them. All require that the properties being purchased meet certain minimum standards. Here is some, more information about various government loan programs:

FHA Loans

With FHA insurance, you can purchase a home with a very low down payment (from 3 percent to 5 percent of the FHA appraisal value or the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region.

VA Loans

The VA guarantee allows qualified veterans to buy a house costing up to $203,000 with no down payment. Moreover, the qualification guidelines for VA loans are more flexible than those for either FHA or conventional loans. If you are a qualified veteran, this can be an attractive mortgage program.

To determine whether you are eligible, check with your nearest VA regional office.

Balloon Loans

Balloon loans offer lower interest rates for shorter term financing, usually five, seven, or ten, years. At the end of this term, they require refinancing or paying off the outstanding balance with a lump-sum payment. Balloon mortgages may be suitable if you plan to sell or refinance your home within a few years and want a fixed, low monthly payment. The advantage they offer is an interest rate that is lower than that of a fully amortizing fixed-rate mortgage. For example, your initial interest rate may be 7.5 percent, and you would pay that rate for the first five, seven, or ten years (depending on the term. of your balloon loan). Then, your entire outstanding loan balance would be due to the lender or you might have to pay a fee to refinance your loan at the prevailing interest rate. However, ask about all the conditions for a refinance option at the end of the balloon term. If you don't feel you will be, able to meet all 'the refinance' conditions or think the balloon term may be up before you are -ready to move, this type of loan may not be appropriate for you.

Information supplied by the Mortgage Bankers Association of America.