Understanding Your Mortgage Options

Once you think through your goals and determine how much you can comfortably afford to pay each month, then it’s time to choose a mortgage that works for you.  Choosing one may seem overwhelming, but with the help of a lender, you can select a mortgage that is right for your financial situation.

Here are the major mortgage types:

Fixed-rate mortgages

Your interest rate and your monthly payment of the principle and interest will stay the same for the entire term of the loan. This type of mortgage tends to be the most popular because it protects you from the possibility of future monthly payment increases and is very straightforward.

Fixed-Period Adjustable-Rate Mortgage (ARM) or hybrid ARM

Most lenders today offer a fixed-period or “hybrid” ARM,—which is an adjustable-rate mortgage that features an initial fixed interest rate period, typically of 3, 5, 7, or 10 years. After the fixed-rate period expires, the interest rate becomes adjustable for the remainder of the loan term. Fixed-period ARMs are often named by the length of time the interest rate remains fixed.

Example: In a 5/1 ARM, the “5” stands for the five-year “introductory period,” during which the interest rate remains fixed. The “1” shows that the interest rate is subject to adjustment once per year after the introductory period and for the remainder of the loan term.

Interest-Only Mortgage

Interest-only mortgages are adjustable-rate or fixed-rate loans, which contain an interest only payment option during a set period in the first years of the loan, often the first 10 years. During the interest-only period, borrowers can delay making principal payments and make monthly payments that only repay interest. After the interest-only period ends, assuming that you selected this option and made only interest payments, the monthly payments would significantly increase when the required monthly payments started to include principal plus interest.

In general, interest-only mortgages may be a good choice for only a small number of buyers with very special circumstances. Carefully consider payment shock when considering an interest-only payment option.

Alternative Mortgage Options

Some eligible homebuyers may qualify for a FHA or VA loan. These loans tend to allow a lower down payment and credit score when compared to conventional loans.

FHA Loans

FHA loans are government-insured loans that could be a good fit for homebuyers with limited income and funds for a down payment.

VA loans

VA loans are offered by VA-approved lenders, and are insured by the Department of Veterans Affairs. To qualify for a VA loan, you must be a current or former member of the U.S. armed forces or the current or surviving spouse of one. If you meet these requirements, a VA loan could help you get a mortgage.