you’ve made the decision to buy or refinance a home, finding the
best loan for your financial situation may seem like a difficult
task. At ERA Meridian Real Estate Group, we believe a well-informed
homeowner makes better and smarter decisions. That's why we try to
explain to each homeowner their available financial options so that
they can make the best decision possible.
Types of Loans There are mortgage loans to suit just about every financial
situation. Generally, all fall into two main categories: fixed rate
mortgages, and adjustable rate mortgages.
Read on for details about the many loan options and the financial
situations for which they might work best.
Fixed Rate Mortgages With a fixed rate mortgage, payments for the interest rate and the principal remain fixed over the life of the loan. As a result, monthly loan payments stay the same over the life of the loan. Taxes, however, may change according to your local or state tax laws.
Advantages of Fixed Rate
• The interest rate stays the same—it doesn’t go up even if rates in the market do
• Monthly payments of principal and interest don’t change
• May be a good choice for homebuyers who plan to own their home for a long time
Disadvantagesof Fixed Rate
• May cost more than other loan types—the interest rate is often higher than rates for adjustable rate mortgages
• A long-term loan may not be suitable for homebuyers planning to move or refinance within 5 to 7 years
Types of Fixed-Rate Mortgages Fixed rate mortgages traditionally have 15-year or 30-year amortization terms. With ERA Mortgage, in addition to 15- and 30-year terms, 40-year and 20-year options are also available.
Which Term Will Work Best for You?
Benefits of a Shorter Term Mortgage:
• May be good for homebuyers planning to own a home for a shorter time
• Loan is paid off more quickly
• Generates less interest over the life of the loan, so it costs less overall
• Translates into higher monthly payments
• Builds equity faster
Benefits of a Longer Term Mortgage:
• May be good for homebuyers planning to own a home for a longer time.
• Loan is paid off more slowly
• Generates more interest over the life of the loan, so it costs more overall
• Translates into lower monthly payments
• Builds equity more slowly
Adjustable Rate Mortgages (ARMs) With an adjustable rate mortgage (ARM), the interest rate is fixed for a certain number of years. Afterwards, the rate goes up or down periodically based on an economic index, which lenders use as a benchmark for interest rate adjustments.
The initial fixed rate, or “teaser rate” of an ARM is usually lower than the rate of a fixed rate mortgage.
After the initial period, the rate adjusts based on the rate index used by the lender. With every rate adjustment, the mortgage payment will change.
The amount of time between rate adjustments is called the adjustment period. Many ARMs have a one-year adjustment period, meaning that the interest rate will adjust every year. Because rate adjustments can be unpredictable, most ARM programs offer a rate cap that limits the amount the interest rate can increase each year or over the term of the loan. The term for most ARMs is 30 years.
Advantages of ARM's:
• The teaser rate keeps initial monthly payments low
• If interest rates go down, the homebuyer will have lower payments
• May be a good choice for homebuyers who relocate often or who plan to move after a few years
• May be suitable for homebuyers planning to refinance within 5 to 7 years
• May be appropriate for homebuyers who like the initial payment stability but can afford later
of ARM's: • After the initial
fixed rate period, the rate becomes adjustable and monthly payments
could increase • May not be the optimal
choice for homebuyers on a fixed income
• May not be the best choice for homebuyers who plan to stay in their home for longer than the teaser rate period
Types of Adjustable Rate Mortgages (ARM's)
An adjustable rate mortgage is often written as a pair of numbers—for instance, “3/1 ARM”, “5/1 ARM”, or “3/3 ARM”. The first number indicates the number of years the interest rate will remain fixed. The second number indicates the adjustment period of the loan—how often (in years) the interest rate will adjust after the initial fixed-rate period.
Example: For a 3/1 ARM loan, the interest rate is fixed for the first three years. Starting in the fourth year, the rate adjusts every year. Payments are subject to change every year for the remainder of the loan.
Examples of ARM Loans
• 5/1 - Fixed rate for first 5 years, adjustments every year starting in 6th year
7/1 - Fixed rate for first 7 years, adjustments every year starting in 8th year
10/1 - Fixed rate for first 10 years, adjustments every year starting in 11th year
With an interest-only ARM, monthly payments for the initial period of the loan are made only on the interest. During this time, the interest rate is fixed.
Once the interest-only period is over, monthly payments are made on both the interest and the principal for the remaining term of the loan, and the interest rate is adjusted every year. Interest-only ARMs are available with three-, five-, seven-, and 10-year interest-only terms.
Example: For a three-year interest-only ARM loan, monthly payments are only made on the interest for the first 3 years of the loan. Starting in the fourth year, payments are made on both interest and principal for the remaining life of the loan.
A loan for an amount of money larger than the conforming loan limit set by the government-backed agencies Fannie Mae and Freddie Mac is called a jumbo loan. The agencies buy groups of mortgages and re-sell them as investments. The conforming loan limit is the maximum loan amount that these agencies will buy.
Federal Housing Administration (FHA) Mortgages
A mortgage secured by the Federal Housing Administration (FHA) requires a down payment as low as 3.5% of the purchase price. FHA loans are designed to make purchasing a home more affordable than it would be with a conventional loan, especially for the first-time homebuyer. FHA loans are subject to limits on the amount of money that can be borrowed. These limits vary from state to state.
• Low down payment-as little as 3.5%
• Ratios that make it easier for you to qualify
• You can use gifts and cash on hand for closing costs
• May be more affordable than a conventional loan
Veteran Affairs (VA) Mortgages
A mortgage guaranteed by the Department of Veteran Affairs (VA) requires little or no down payment. VA loans are available only to military personnel, veterans, or the spouses of veterans who died of service-related injuries. VA loans are designed to make purchasing a home more affordable than it would be with a conventional loan.
Under the law, veterans are entitled to VA home loan benefits based on military service. Eligible veterans must still meet credit and income standards in order to qualify for a VA-guaranteed loan.
A lender cannot make a VA-guaranteed loan to an ineligible applicant under any circumstances.
Mortgage Questions & Answers
Are you interested in learning more about mortgages? Find out the
answers to frequently asked questions within the
Mortgage Questions and
Answers section of our website.
Find out the Answers Today:
• When should I start shopping for a mortgage and how do I know what I can afford?
Do I need to sell my current home before I apply for a new mortgage loan?
How much down payment will I need?
Can I be pre-approved for a loan if I have credit problems?
Why is an appraisal necessary for obtaining a mortgage? Can I use the tax value of the home?
How do I get an appraisal?
How much will my property taxes be?
Why is the Annual Percentage Rate different from the interest rate?
What is a Truth in Lending statement?
What is a Good Faith Estimate (GFE)?
How does an interest-only loan work?
How often do interest rates change?
What factors go into determining my customized interest rate?
When should I lock my rate?
Once I have selected a program, what are my rate options?
What if interest rates go down after I lock my rate?
What happens if my loan doesn't close before the rate lock expiration date?
And Many More...