The world of lending in 2010
Borrowing money for a home purchase has some rules. The world of lending is intricate and anyone who wants funding needs to be able to wade through the many different loan products available. Mortgages are confusing these days and every different type of loan has variables that determine a different overall cost and payment throughout its lifespan. Many mortgage products are an apple-to-apple comparison and a basic education can help consumers make the right decisions for their individual financial situations.
The 30-year fixed mortgage
The most common type of mortgage is the traditional 30-year fixed model. It combines a fixed interest rate with a long-term lifespan. That breaks down payments and makes them manageable for millions of American households. This is the best loan for borrowers who are planning on staying in one house for a long period of time and those who want the stability of a monthly payment that doesn’t change. Though throughout the past few decades this is the type of mortgage that prevailed, in the past five years other more unusual mortgage loans began to take hold. Many experts claim that this is the reason for the lending crash that contributed to the recession. They believe that too many lenders tried to stray from the traditional time-tested 30-year fixed mortgage for the purpose of extending loans to more customers.
The 15-year fixed mortgage
This mortgage is very similar to the 30-year fixed mortgage. The difference is that interest rates on these types of loans traditionally are lower due to banks having a lower long-term risk. Borrowers pay off this type of loan in half as much time as its 30-year counterpart and it grows equity faster as a result. This is a great option for borrowers who want to pay back their mortgages faster. It is also a good option for borrowers who want to refinance their mortgages without extending the term back out to the 30-year model.
1-year ARM
ARM stands for adjustable-rate mortgage. This type of loan has no guaranteed mortgage rate over the course of the loan. There is an introductory rate on these loans that lasts for 1-year. Rates for these loans are significantly lower than those for other types of loans and the term is usually 30 years. For consumers borrowing money short-term, this could be a good option. Buyers who don’t plan on staying in one home for a long time can find lower monthly borrowing costs. It also works well for borrowers with the ability to make higher payments due to larger incomes.
5/1 ARM
The 5/1 ARM is another adjustable-rate mortgage that has a fixed rate for the first five years. After the initial five years, the rate adjusts periodically. Normally these are also 30-year long loans. These types of loans are good for borrowers who plan on selling within five years and want to keep their mortgage payments as low as possible. Again, borrowers with income to sustain higher payments can use these types of mortgages to their advantage. The thing to remember about this loan is that the interest rate is not guaranteed. Buyers benefit from a fall in the interest rate, but are stretched when it rises.
Other types of loans
Prior to the recession, lenders came up with various other loan structures to serve those borrowing money. There is an interest-only mortgage that allows a buyer to pay just the interest and leave the balance untouched. Balloon mortgages offer lower rates, but then require a large sum payment. Assumable mortgages can be transferred from a homeowner to a buyer to eliminate the need for a new mortgage for the sale. All borrowers should talk to a financial expert who specializes in mortgage loans prior to buying. They can assure that the mortgage product they get is truly the best one for their situation.
