Determining the most financially appropriate mortgage product for your situation is becoming increasingly difficult, as more products are made available. In reality, the average buyer ends up with the traditional 30-year fixed rate loan; however, the last few decades have seen an increase in many adjustable rate loans.
Fixed rate mortgages are categorized by interest rates that do not vary during the term of the loan. Unlike an adjustable rate mortgage that combine a fixed-rate period and an adjustable rate period. A typical ARM (adjustable rate mortgage) can have a 3 or 5-year fixed term with an annual adjustment that is based on current interest rates.
Some buyers opt for ARM loans because the initial fixed period provides for lower monthly mortgage payments and thereby making larger cost home more affordable in the short term. While many of these loans have caps on the adjustable rate, it can still provide financial instability for borrowers without cash reserves and robust earnings. Typically investors or individuals not planning to retain the home for a longer term favor ARM loans. These buyers likely plan to sell before a rise in interest rates.
Fixed rate mortgages are available in a variety of types. While the rate will remain fixed, the repayment term can be changed on these loans. By elongating the payment term, overall monthly payments will be lower, but more interest will be paid over the life of the loan. Short term fixed loans have the benefit of being cheaper because at the end of the loan the interest paid will result in a savings when compared to longer term products.
Also, there are mortgages secured through the federal government. To assist lower income buyers, the Federal Housing Administration (FHA) will secure loans that require very little down payment and has more favorable terms for borrowers with less than stellar credit. Military service members and their surviving spouses can secure loans secured by the Veterans Administration. These loans also provide favorable terms among varied credit scores and require less to no down payment.
While not as frequently used, there are also jumbo loans for borrowers purchasing homes more than $417K. These amounts can be even higher for expensive markets like New York City. Interest only mortgage, while no longer common, allow borrowers to pay only the interest on their loan for a set repayment term. Once the term ends, borrowers are then assessed the amount of the principle not paid over the prior term. For example, if $30,000 were not paid over a five-year interest only term, then the $30,000 would be divided equally over the remaining years of the loan. These types of loans are typically used by investors that seek to refrain from having too much of their income stored in their housing cost.