Mortgages are generally available at 15-, 20-, or 30-year terms. In general, the longer the term, the lower the monthly payment. However, shorter terms mean you pay less interest over the life of the loan.
A fixed rate allows you to lock in a low interest rate as long as you hold the mortgage and, in general, is a good choice if interest rates are low. A fixed interest rate is based on the lender’s assumptions about the average discount rate over the fixed rate period. An adjustable-rate mortgage (ARM) usually offers a lower rate that will rise as market rates increase. Most have an initial fixed-rate period during which the borrower’s rate doesn’t change, followed by a longer period during which the rate changes at preset intervals. ARMs usually have a limit as to how much and how frequently the interest rate can be increased. These types of mortgages are a good choice when fixed interest rates are high or if you expect your income to grow significantly in the coming years.
Also sometimes called “exotic,” these mortgage types were common in the run-up to the housing crisis, and often featured loans with low initial payments that increase over time. Nontraditional mortgages include interest-only mortgages, payment option adjustable rate mortgages (ARMs) and subprime mortgages. In an interest-only mortgage The borrower only pays the interest on the mortgage through monthly payments for a term that is fixed on an interest-only mortgage loan. The term is usually between 5 and 7 years. After the term is over, many refinance their homes, make a lump sum payment, or they begin paying off the principal of the loan. A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600). This is given because more than likely they cannot get a traditional loan due to their low credit score.
This is a form of non-traditional financing where your interest rate will be very low for a short period of time—often three to seven years. Payments usually only cover interest so the principal owed is not reduced. This type of loan may be a good choice if you think you will sell your home at a large profit in a few years.
These loans are sponsored by agencies such as the Federal Housing Administration or the Department of Veterans Affairs. They offer special terms, including reduced interest rates to qualified buyers. VA Loans are open to veterans, reservists, active-duty personnel, and surviving spouses and are one of the only options available for zero down payment loans. FHA loans are open to anyone, and while they do require a down payment, it can be as low as 3.5 percent. Drawbacks include a slower loan process and—for FHA loans—the need to pay mortgage insurance.
As the housing market shifts, so do lending practices. A mortgage broker—an independent professional who acts as an intermediary between you and lending institutions—may be able to help you find a better rate than you can on your own. Also, be sure to shop around; slight variations in interest rates, loan amounts, and terms can significantly affect your monthly payment.