The things that can affect which type of mortgage option is the right one depends largely on the home buyer. There are different types of low down and no down payment mortgages. Some home loans are better suited to specific types of homes. Distressed homes, for example, are best paired with an FHA 203k renovation loan. This type of home loan has funds for repairs structured in it.
Of all the mortgage options available, fixed-rate loans are the safest. In the days of subprime loans from predatory lenders, many borrowers fell victim to overwhelming debt. A fixed-rate home loan is safer for many home buyers; there is no confusion about monthly payments and interest.
Compared to an ARM, a fixed rate mortgage is also much easier to calculate. The best known of them is the conventional 30-year-old. Home buyers typically make a 10% to 20% down payment with a fixed interest rate. FHA loan products have a 3.5% deposit.
Conventional loans have an insurance premium from the lender when you deposit less than 20%. This premium called PMI, or private mortgage insurance, protects lenders in the event of default by the borrower. If the loan-to-value ratio reaches 80%, the PMI can be discarded. Buying at lower rates allows buyers to make additional principal payments. This means that the PMI can be discarded sooner rather than later.
For some home buyers, a 15-year or biweekly fixed-rate loan is more attractive. These debts are paid off much faster than conventional 30-year mortgages.
An ARM, or adjustable rate mortgage, can be a useful product for some home buyers. This type of loan is best for buyers when interest rates are low. What borrowers should consider is how long they intend to stay in the home. Borrowers benefit by staying just a few years, selling the property, and moving in before rates go up. If a borrower can pay off the mortgage before rates go up, that’s even better.
ARMs also have fixed fees, but they are more difficult to understand. There is a specific rate that, as interest rates rise and fall, remains the same. As rates go up and down, a percentage is added or subtracted, but subject to limits. These limits dictate the highest and lowest rates you can expect. Make sure you understand the loan terms in an ARM.
Buyers should spend time calculating mortgage options with different down payments and interest rates. This helps them see how the expense of carrying a mortgage will affect their finances.