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What are the different types of mortgages available, and which are the best?
Question: What are the different types of mortgages available, and which are the best?
Answer: It depends on your particular financial situation and your goals.
A few decades ago, taking on a mortgage was a simple proposition, with the borrower promising to pay back the amount of the loan plus a fixed rate of interest, usually over a period of 30 years. Today, borrowers are barraged with hundreds of mortgage loan options, which can be overwhelming.
The good news is that the good old-fashioned 30-year fixed rate loan is still available; but today's buyers have a variety of other options when it comes to financing.
Here are some of the loan options available:
First, there is the traditional fixed-rate loan, where a fixed rate of interest is charged over the life of the loan. The loan's typical duration is 30 years, but buyers may select to pay back the loan over a shorter period of time (usually 15 years) to save interest.
Adjustable rate mortgages (ARMs) are just that: the rate of interest and payment amount fluctuate with a predetermined index such as cost of funds or Treasury bills. The rate
of interest charged for the first year or so is usually low, which is what makes ARMs attractive.
-More-The trade-off, of course, is the uncertainty about what will happen to interest rates after the first year.
Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages are both government-backed loans, which enable buyers to purchase with little or no down payment. The maximum loan amount available through the FHA is linked to median house prices within a geographical area, and requires a 5% down payment. VHA loans (available only to veterans) require no down payment.
Then, there is a balloon mortgage. This loan has payments amortized over a lengthy period of time (say 20 or 30 years), but is payable at the end of a shorter term, such as seven years. The purpose is to enable the buyer to get into a home with low monthly payments. With balloons, a buyer, for instance, might make principal-plus-interest payments (or just interest, depending on what was agreed upon) according to a 30-year loan payoff schedule. At the end of, say, seven years, however, the entire balance becomes due, at which time the buyer may need to obtain financing. Your local real estate agent can help explain these and many other options.
To choose the best mortgage, buyers should consider their particular situation and ask questions such as, "What mortgage payments can I afford with my present income?"; "How much do I want to leave in reserve for home maintenance and emergencies?"; and "How are my income and financial situation likely to change in the years ahead?".
"Real Service in Real Estate." For a personal consultation on buying or selling real estate, Janis Peterson, GRI, ABR, CSP Realtor® can be reached at (610) 642-3744, e-mail: firstname.lastname@example.org. Prudential Fox & Roach Realtors® is an independently owned and operated member of The Prudential Real Estate Affiliates, Inc.
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