Mortgage lending as of 2010
Borrowing money for a home purchase has some rules. The world of lending is intricate and anyone who wants funding needs to be able to wade through the many different loan products available. Mortgages are complicated, and each type has advantages and disadvantages, costs and payment structures. Mortgage products are relatively easy to compare, and just knowing the basics can help potential borrowers know what makes sense for them.
30 Year Fixed
The most common type of mortgage is the traditional 30-year fixed model. The fixed rate combines with a long term on the loan. That breaks down payments and makes them manageable for millions of American households. This loan is best for people planning on staying in a home for a long time and don’t want a payment subject to variation. Though throughout the past few decades this is the type of mortgage that prevailed, in the past five years other more unusual mortgage loans began to take hold. Many experts claim that this is the reason for the lending crash that contributed to the recession. They believe that too many lenders tried to stray from the traditional time-tested 30-year fixed mortgage for the purpose of extending loans to more customers.
The 15-year fixed mortgage
This mortgage is very similar to the 30-year fixed mortgage. The difference is that interest rates on these types of loans traditionally are lower due to banks having a lower long-term risk. Borrowers pay this loan off in half the time of a 30 year and gain equity faster. It’s good for people who want to pay off the mortgage quickly. It’s a good option for borrowers that want to refinance without extending the term out to 30 years later.
The 1 Year ARM
ARM stands for adjustable-rate mortgage. These loans don’t have a guaranteed rate over the term of the loan. The introductory rate lasts for a year. Rates for these loans are significantly lower than those for other types of loans and the term is usually 30 years. Consumers borrowing money short term might like this option. Buyers that don’t plan on staying in their home for long can get lower payments. It also works well for borrowers with the ability to make higher payments due to larger incomes.
The 5/1 ARM
The 5/1 ARM is another adjustable-rate mortgage that has a fixed rate for the first five years. After the initial five years, the rate adjusts periodically. Typically, the term is for 30 years. These are good for borrowers planning on selling within five years and want mortgage payments to be low. Again, borrowers with income to sustain higher payments can use these types of mortgages to their advantage. You have to remember that the interest rate isn’t guaranteed. The buyer benefits from interest rates that fall, but hampered when it rises.
Other loan types
Prior to the recession, lenders came up with various other loan structures to serve those borrowing money. There is an interest-only mortgage that allows a buyer to pay just the interest and leave the balance untouched. Balloon mortgages offer lower rates, but then require a large sum payment. Assumable mortgages can be transferred to a homeowner to a buyer, without needing a new mortgage for the sale. Borrowers should consult with an expert before getting a mortgage to determine the best mortgage loans for their needs. They can assure that the mortgage product they get is truly the best one for their situation.
