Jake's Lending Tip of the Week
It is a common misconception that there are limited options when it comes to taking out a mortgage. Many think that the only options are a conventional or government backed (FHA, VA, USDA) loan that is for 30 years and has a fixed rate. This could not be farther from the truth. The lending world is diverse, and presents multiple options that fit the needs of each individual borrower. The term and amortization type are the main variables to consider when looking at your options.
The term of a mortgage can vary from 10 to 30 years in five year intervals. There are both advantages and disadvantages to altering the term from the standard 30 years. By shortening the term, you will lower your interest rate while simultaneously lowering the interest paid over the life of the loan. Shortening the term also allows the borrower to gain equity in the property at an accelerated rate and pay less interest. The disadvantage of a shorter term is a higher monthly payment.
While a fixed rate is the standard choice when looking at amortization type, there are options available. The most common alternative would be an adjustable-rate mortgage (ARM). ARMs feature a fixed rate that is typically lower than current market standards for a set period of time. Once the pre-designated period passes, the rate will change based upon the market rate. This is a popular option when rates are high. The risk of an ARM is that rates go up, thus increasing the monthly payment. Another option is an interest only loan. In this situation, the borrower makes monthly payments equal to the interest owed. Upon completion of the term, the borrower makes a balloon payment, which is equal to the remaining principal on the mortgage. This is great option for the borrower who needs to maintain a lower monthly payment. The pitfalls include a large payment due at the end of the term, as well as garnering equity at a slower rate.
With so many options available to the consumer, it is important to have a clear understanding of the benefits and disadvantages. Give me a call to discuss your options!