Fixed mortgage: Simple interest, fully amortized home loans have payments that remain the same for the full term. 30 year and 15 year fixed rate mortgages are the most common. Short term home loans accelerate principal reduction and cut interest expense, while a 30 year mortgage can provide lower payments. Some lenders offer mor term options, such as 20 year or 10 year fixed rate loans. Other loan options can include low cost or zero points mortgage programs.
Adjustable mortgage: The most common adjustable rate loan is a fully amortized 30 year mortgage. Home loan rates are determined by adding an index to a margin. The index is a financial point of reference, such as the one year treasury, which can fluctuate. The margin is set by the lender, and remains the same for the life of the loan. Lenders offer ARMs with current mortgage rates fixed for the initial 3, 5, or 7 years, with the remaining term adjusting on a yearly basis. These programs typically have a low cost or zero point home loan option.
FHA mortgage: Popular for buying a home because of the low down payment, plus the credit and income guidelines offer easy qualifying compared to conventional loans, FHA loans offer:
- Down payment as low as 3.5% of purchase price when buying a home
- FHA guidelines allow lower credit scores for more easy qualifying
- Higher debt ratios allow home buyers to qualify with less income
- A non-occupant co-borrower can help a first time home buyer qualify
- Low cost fees with limitations set by FHA & zero points option
- A previous bankruptcy only needs to be discharged for two years
- Less cash reserves make it easier to qualify for a first time home buyer
- FHA allows all or part of the down payment to be a gift from close relatives
When buying a home, remember to budget enough money for closing costs and setting up an impound account, which is money collected at closing held in reserve for taxes and insurance.