Conventional loans are offered by a traditional
private lender. They may be fixed rate, adjustable, hybrid or other types. While
conventional loans may be harder to qualify for than government backed loans, they often
require less paperwork and typically do not have a maximum allowable amount.
General Categories of Loans - Fixed Rate, Adjustable Rate and Hybrid Loans
Fixed Rate Mortgages - A fixed-rate mortgage carries the same interest
rate for the life of the loan. Traditionally, fixed-rate mortgages have been the most
popular choice because the fixed monthly payment is easy to plan and budget for, and can
help protect against inflation. Fixed-rate mortgages are most common in 30-year and
15-year terms, but recently more lenders have begun offering 20-year and 40-year loans.
Adjustable Rate Mortgages (ARM) - Adjustable-rate mortgages interest
rates and monthly payments can change over the life of the loan. This is because the
interest rate for an ARM is tied to an index (such as Treasury Securities) that may rise
or fall over time. In order to protect against dramatic increases in the rate, ARM loans
usually have caps that limit the rate from rising above a certain amount between
adjustments, as well as a ceiling on how much the rate can go up during the life of the
loan.
Hybrid Loans - Hybrid loans combine features of both fixed rate and
adjustable rate mortgages. Typically, a hybrid loan may start with a fixed rate for a
certain length of time, and then later convert to an adjustable-rate mortgage. Check with
your lender and find out how much the rate may increase after the conversion, as some
hybrid loans do not have interest rate caps for the first adjustment period.
The length of time you plan to own your property should have a direct influence on the
type of loan you choose. If you plan to stay in a home for 10 years or longer, a
traditional fixed rate mortgage may be your best choice. If you plan on owning your home
for a short period (5 years or less), then the low introductory rate of an adjustable-rate
mortgage may make the most financial sense.
FHA and VA loans - U.S. government loan programs such as (FHA) and (VA)
are designed to promote home ownership for people who might not otherwise be able to
qualify for a conventional loan. Both loans have lower qualifying ratios than conventional
loans, and often require smaller or no down payments. Any U.S. citizen may apply for a FHA
loan. VA loans are only available to veterans or their spouses and certain government
employees. |
