Mortgage loans are typically categorized as either fixed rate or adjustable rate. Sometimes they can even be a combination where the rate is fixed for a certain period of time and then converts to an adjustable rate for the remainder of the loan term. Common loan terms are 30 or 15 years, but also might have terms as short as 10 years and can offer 20 and 25 year terms in some instances.
In most cases, the shorter the loan term, the lower the interest rate. As an example, total interest paid in a 15 year loan may end up being less than half what you’d pay on a 30 year loan, but your monthly payments will be higher.
Fixed Rate Mortgage Loans
The interest rate is fixed for the life of the loan, regardless of what rates do over the life of your loan. This ensures that your payment remains the same each month, which can make budgeting a lot easier. However, if your loan has an escrow account that is collecting for taxes or insurance, that likely will change over time and cause your payment amount to change annually.
Adjustable Rate Mortgage Loans (ARMs)
The interest rate changes periodically by adding what’s referred to as a “margin” to an index specified in mortgage documents. These two numbers are combined to create the loan’s interest rate and often times have limits (sometimes referred to as “caps and collars”) that ensure the rate does not increase over a certain amount over the life of the loan. As an example, a 1-year ARM will adjust every year, typically on the anniversary date of the loan.
Because the rate changes as the index changes with fluctuations in the market, monthly payments on an adjustable rate mortgage loan likely will be different every year. However, if you are planning on being in your home a short period of time, an ARM may be a very good option with a lower interest rate.
The typical hybrid mortgage loan combines an initial fixed interest rate for a specified period of time and then converts to an adjustable rate for the remainder of the loan term. Because these loans have a variety of options, they can often times serve a wider variety of borrower needs (and qualification standards are often more lenient than a traditional loan).
Rural Development (RD) Mortgage Loans
Under the Guaranteed Loan program, Rural Development guarantees loans made by private sector lenders. (A loan guaranteed through RD means that, should the individual borrower default on the loan, RD will pay the private financier for the loan.) The individual works with the private lender and makes his or her payments to that lender.
FHA Mortgage Loans
Despite what many people think, the Federal Housing Administration (FHA) does not actually issue mortgage loans, it provides mortgage insurance which protects lenders. Customers like FHA loans because they have more liberal qualification requirements, much like hybrid mortgage loans (mentioned earlier).
In addition, they typically have a lower down payment requirement (as low as 3.5%), lower monthly insurance premiums and often have lower closing costs. This makes an FHA loan a very attractive loan for the first-time home buyer and also for families with low and moderate income levels.
FHA 203k Home Improvement Loans
One of the most popular and diverse home improvement loans is the FHA 203k. You can make home improvements to the house you want, or the home you already own. Use the funds for simple upgrades to your home like a kitchen or bath improvement, or to completely reconstruct a home that is presently unlivable. You can even use a 203k Rehabilitation Loan to tear down an existing structure and build a new one using some portion of the existing foundation. You can borrow up to 96.5% of the appraised value - based on the value when the improvements or repairs are completed.
With the FHA 203k you can:
§ Replace a roof
§ Re-side the home
§ Re-paint inside and outside of the house
§ Replace appliances
§ Put in new flooring
§ Build or replace a deck/patio/porch
§ Replace windows
§ Remodel the kitchen
§ Repair or replace the septic system
VA Mortgage Loans
Similar to FHA loans, VA loans are guaranteed by the U.S. Department of Veteran Affairs and lenders make the loans to eligible veterans for the purchase, construction, or energy-saving improvement (approved by the lender and VA) of a home. VA loans share similar eligibility requirements as FHA loans, often with lower closing costs, and more liberal terms (usually without requiring a down payment) and even negotiable interest rates. If you qualify, the VA will issue a certificate of eligibility that you can provide a lender when making application for your loan.