Fixed Rate Mortgage
Fixed rate mortgages allow a borrower to know what all future payments will be. You will pay the same monthly payment through the entire term of your mortgage. There are two main types of fixed rate mortgages; 30 Year Fixed Rate Mortgages and 15 Year Fixed Rate Mortgages. Other terms such as 10 or 20 Year Fixed Rate Mortgages are offered but they are not as commonly used.
Fixed rate mortgages are helpful because they allow you to predict what your house payment will be in the future. You always know that no matter what happens with interest rates, your payment won't change.
With a fixed rate mortgage, you typically have a higher monthly payment than you might have with some other mortgage choices. That is because the fixed rate mortgage offers you the safety of knowing that your payments will not increase.
Generally you'll find that fixed rate mortgages are the right choice if; you think interest rates are low, you can afford the payment for the house you want, you need to budget for and predict monthly payments, you will keep your home for a relatively long period of time.
Adjustable Rate Mortgage
Adjustable rate mortgages (ARMs) are home loans with a rate that varies. As interest rates rise and fall, rates on adjustable rate mortgages follow. These can be useful loans for getting into a home, but they are also risky.
Adjustable rate mortgages are unique because the interest rate on the mortgage adjusts with interest rates in the marketplace. This is important because mortgage payment amounts are determined by the interest rate on the loan. As the interest rate rises, the monthly payment rises. Likewise, payments fall as interest rates fall. The rate on your adjustable rate mortgage is determined by some market index. Many adjustable rate mortgages are tied to the LIBOR, Prime Rate, Cost of Funds Index, or other index.
A main reason to consider adjustable rate mortgages is that you may end up with a lower monthly payment. While you may benefit from a lower payment, you still have the risk that rates will rise on you. If that happens, your monthly payment can increase dramatically. What was once an affordable payment can become a serious burden and the payment can get so high that you may have to default on your loan.
To manage the risks, you'll want to pick the right type of adjustable rate mortgage. The best way to manage your risk is to have a loan with restrictions and "caps". Caps are limits on how much an adjustable rate mortgage can actually adjust. Also your loan may include a guaranteed number of years that must pass before the rate starts adjusting; the first five years, for example.
FHA Loans
The Federal Housing Administration (FHA) loans carry many benefits for home buying and refinancing. FHA does not make loans or guarantee loans, it insures loans. The insurance removes or minimizes the default risk lenders face when buyers put down less than 20 percent. Without further approval from FHA, its approved lenders are authorized to take loan applications, process loan applications and underwrite and close the loan.
If your credit is less than perfect, FHA might be the loan for you. You may qualify for an FHA loan even though you have had financial problems. FICO scores can be lower than those for a conventional loan. If you filed bankruptcy you can obtain an FHA loan 2 years from the date of your bankruptcy discharge, as long as you've maintained good credit since your debts were discharged.
If you keep your credit in excellent shape since a foreclosure, an FHA loan will be available to you in 3 years from the final date of your foreclosure.
FHA loans have competitive rates and terms. There is little or no adjustment to the interest rate for an FHA loan. Mortgage Insurance is funded into the loan, a small portion for the mortgage insurance premium is added to the monthly payment, but it is far less than private mortgage insurance premiums. Borrowers can finance 97% of the purchase price and put down only 3%. Allowable debt ratios are higher than the debt-ratio limits imposed for conventional loans.
Repairs to property must be made before loan can close. FHA appraisals do not take the place of a home inspection.
FHA loans are available to anybody, there are no income limit qualifications.
VA Loans
Banks and other private mortgage companies make a special type of home loan to veterans of the US Armed Services. A portion of each loan is guaranteed by the Veterans Administration (VA), and protects the lender's investment if the borrower defaults.
Who is eligible for a VA loan, Wartime/Conflict Veterans who were not dishonorably discharged, and served at least 90 days; WWII, Korean Conflict, Vietnam Era, Persian Gulf War, Afghanistan and Iraq. Peacetime service of at least 181 days of continuous active duty with no dishonorable discharge. If you were discharged earlier due to a service connected disability, you should speak with the regional VA office to verify eligibility.
Members of the Reserves and National Guard who have completed six years of service and have been honorably discharged (or are still serving) may be eligible for a VA loan. Contact your regional VA office for more details.
Other types of service that may make you eligible for a VA loan; certain US citizens who served in the armed forces of a government allied with the US during WWII, Surviving spouses of eligible persons who died as the result of service or service-connected injuries, the spouse of any member of the Armed Forces serving on active duty who has been listed as a prisoner of war or missing in action
for more than 90 days.
Anyone with questions about eligibility should speak with their regional VA office.
A Certificate of Eligibility is a document issued by the VA that lets lenders know you are eligible to apply for a VA loan. The certificate does not guarantee the bank will approve your credit application.
The VA home loan is intended to allow a veteran to purchase a home as his primary residence. You cannot use your VA Eligibility to purchase investment property, a second home, or a home for family members/siblings to live in.
The pros of using your VA Home Loan Benefits include purchasing a primary residence without having to make a down payment, there are multiple products available to the veteran, VA loan qualification guidelines are designed to make the process very simple, because of VA increases in available Entitlement, it is possible for a veteran to purchase a second primary residence without having to sell his old property.
The cons of a VA loan, since VA does not require a down payment, you will probably owe as much as the house is worth. At the time of closing on your new home you will not have any equity built into your home.
Home Equity Line of Credit
The most common line of credit for consumers is a home equity line of credit. You use your home equity as collateral. The bank assumes that you'll repay the line of credit to avoid losing your home in foreclosure.
A home equity line of credit (HELOC) is more flexible than a home equity loan. You only borrower what you need, and you can typically go back for more money when you need to as long as you stay below your maximum credit limit. You might use a checkbook to access your line of credit. A second mortgage typically involves a single loan that you repay over time. A line of credit will have a variable rate, while second mortgage can have a fixed or variable interest rate.
Your line of credit will have a draw period and a repayment period. During the draw period, you borrow money and use your line of credit. This usually lasts for 10 years. During the repayment period, you repay principal and interest on the loan.
Keep in mind, like most loans, lines of credit have closing costs associated with them.
Second Mortgages
A second mortgage is simply another mortgage on your home, a loan secured against the property. The term "second" indicates that the loan does not have priority on your home in case you default. Instead, your first mortgage has priority and would be paid before any funds go towards the second mortgage.
These types of loans are appropriate for times when you need a lot of money. You may not have unlimited credit on your credit cards, and finding cash is difficult. By borrowing against a home, borrowers can get bigger loans, and the lender considers a loan against the home to be safer.
The main disadvantage with second mortgages is that you are risking your home by using one. If you cannot pay the loan back, a second mortgage can be catastrophic. Another drawback is that second mortgages have slightly higher rates because of the risk factor.
Keep in mind, like most loans, second mortgages have fees associated with them.
Reverse Mortgages
A reverse mortgage is a loan that allows older homeowners to access the equity in their homes. Instead of making a mortgage payment to reduce your debt, your receive money and increase your debt. Reverse mortgages are an option for people who want to turn substantial home equity into cash.
To qualify for a reverse mortgage, you must; be age 62 or older, have a single-family home or other approved property; own the property, live in the home as your primary residence, make the reverse mortgage your first mortgage, can pay off existing loans with proceeds from your reverse mortgage.
You must also continue to qualify after the loan is made. Generally you have to; continuously use the home as your primary residence, and keep current on taxes, insurance, maintenance, etc.
Like all loans, reverse mortgages have costs. A major cost is the interest you pay on borrowed money. Most costs can be bundled with the loan so you do not pay out of pocket.
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