Types of Mortgage Loans
Available for First Time Home Buyers

All home buyers should study the different types of mortgage loans available. It is important to understand these loan products so that you will be knowledgeable of which one is "best" for you. You may qualify for several loan types, but you need the one that provides the best long-term benefits.

These loan types are broken down for you to easily understand the terminology.


TYPES OF MORTGAGE LOANS:

FIXED RATE MORTGAGE
A fixed-rate loan offers an interest rate that will never change over the life of the loan. The primary benefit is that if interest rates increase during the term of your loan, your rates stay the same.

On the other hand, if interest rates drop during the term of your loan, your rates still stay the same (unless you refinance your home at the lower rate). With a fixed rate loan you have the option to choose your term (amount of years to finance the loan). Those terms can be: 15, 20 or 30 year terms.

  • 30-year fixed rate
    The 30-year term gives you maximum tax advantage by having the greatest interest deduction. The 30 year fixed-rate loan is usually the easiest loan type and term for you to become pre-approved for.

  • 20-year fixed rate
    If you shorten your loan term, you usually get a lower interest rate. The 20-year loan term is not as common as the 30-year, so you'll have to shop around to find the best lender for this loan type.

  • 15-year fixed rate
    Same benefits as the 20-year term. This mortgage has a faster payoff and lower interest rates. However, your monthly payments will be increased, because you are paying off the loan sooner than a 30 year or 20 year term.


ADJUSTABLE RATE MORTGAGE (ARM)
The adjustable rate loan offers a fixed initial interest rate with a fixed initial monthly payment. "Initial" is the key word here, because after some predetermined initial period, the loan is subject to changes in market conditions.

The initial interest rate you pay will probably be lower than a fixed-rate loan; but the uncertainty, of course, comes after the initial period. This type of loan is usually a good option for buyers who only plan to stay in a home for a short while (2 to 3 years is recommended).

In other words, if you turn around and sell the house before the initial fixed-rate period expires, you'll benefit from the lower rate and be out from under that mortgage before the uncertainty sets in. If you plan to stay in the home indefinitely (not necessarily 30 years) you don't want to consider an adjustable rate loan. You deserve the peace of mind knowing that your monthly payments will remain the same no matter how long you occupy the home.

You have little to no control with an adjustable rate. Be very careful before choosing this type of loan. Have a clear vision of what you plan to do with the home you purchase (i.e. a short-term residence, investment property, etc).


BALLOON LOAN
The balloon loan is a short-term, fixed-rate loan that lets you make small payments for an introductory period of time. After the introductory period - usually five, seven or ten years - you must refinance or pay off the remaining balance with one lump-sum ("balloon") payment.


GOVERNMENT LOANS: FHA, VA and RHS

FHA LOAN
A loan insured by the Federal Housing Administration (FHA), open to all qualified home buyers. There are limits to the size of FHA loans, but they are usually enough to cover most moderately priced homes. FHA loans also offer low down payments (usually 3-5 percent).


VA LOAN
A long-term, low or no-down-payment loan guaranteed by the Department of Veterans Affairs (VA). Since this loan is insured by the VA, it has the added benefit of zero down payment. This type of loan is only available to qualified military veterans who have obtained a certificate of eligibility from the Department of Veterans Affairs.


RHS LOAN
The Rural Housing Service (RHS) loan offers low interest rates with no down payment. It is available to households with low to moderate income located in rural areas or small towns.

Always remember to RESEARCH all of the available types of mortgage loans BEFORE you apply for your mortgage loan. Take your time and learn all the conditions of the loan type you are considering. Be careful, ask as many questions as you need to ask, and stay involved in the process!


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