What Types of Mortgage Loan Should You Choose?
Choosing the right mortgage is as important a decision as choosing the right home.
Getting the best deal on a mortgage loan can minimize your monthly payments and maximize
the value of the investment you have made in your home. There are many different
types of mortgage loans available to home buyers today, and it is important to understand the
differences, advantages and disadvantages of each type of mortgage loan.
One of the most common types of home mortgage loan is the conventional fixed rate
mortgage. The loan term for a fixed rate mortgage is generally either 15 or 30 years,
and as the name implies the interest rate is set for the life of the loan and does
not fluctuate. With a fixed rate loan, the home buyer pays the same monthly mortgage
payment for the entire life of the loan.
The opposite of the fixed rate mortgage loan is the adjustable or variable rate
mortgage loan. Unlike the fixed rate loan, where the interest rate remains the
same for the life of the loan, a variable rate mortgage periodically adjusts the
interest rate in response to the general direction of interest rates. The interest
rate on the mortgage loan is tied to a commonly used benchmark interest rate, such
as the prime rate, and it fluctuates along with that underlying interest rate.
A variable rate mortgage loan will have a cap above which the interest rate cannot
rise. It is vital for the potential borrower to run the numbers and make sure he
or she can still make the monthly mortgage payments in the event the interest rate
rises to its maximum allowable level.
As you can imagine, an
adjustable rate mortgage is a great deal when interest
rates are on the decline, and not so good a deal when interest rates are rising.
Of course it is difficult even for experts to accurately predict the direction of
interest rates, but if you are sure rates will fall a variable rate mortgage may
be the right call for you. Variable rate mortgages do generally offer the ability
to transform them to fixed rate loans at a specific interest rate, so there is
at least some protection built into this type of mortgage loan.
Most mortgage loans require a down payment of between 10% and 20% of the value of
the home. There are some loan vehicles available, however, that require a lower
down payment. Some of the new mortgage loan packages require as little as 3%
thereby allowing more and more people to qualify for mortgages. It is still
important, however to make the highest down payment you can any time you purchase
a home. Remember that the higher your down payment, the lower your monthly mortgage
payments will be. Also remember that if your down payment is less than the standard
20% you may be required to purchase costly private mortgage insurance to protect the
lender in the event you default on the home mortgage loan. If you can muster a 20%
down payment you can avoid this costly and unnecessary insurance.
Taking out a mortgage loan with an extremely low down payment is also a dangerous
financial proposition, especially in the event that home prices fall. In an environment
of falling home prices, those home buyers who put down only 3%-5% can quickly find
themselves owing more on their mortgage loan than the home is worth. This is a financially
untenable position to be in, and it could cause financial insolvency or the loss of the home.
It is always better to make the highest possible down payment, no matter what type of
mortgage loan you choose.
Quicken Loans Inc. is the nationís largest online retail mortgage
lender and among the five largest overall retail home lenders in the
United States. The company closed a record $30 billion in retail
home loan volume across all states in 2011. Quicken Loans ranked #1
in customer satisfaction among all home mortgage originators in the
United States by J.D. Power and Associates in 2010 and 2011.