Home loans come in many shapes and sizes. Deciding which loan makes the most sense for your financial situation and goals means understanding the benefits of each. Whether you are buying a home or refinancing, there are 3 basic types of home loans. Each has different reasons you'd choose them.
1) Fixed Rate Mortgage
Fixed rate mortgages usually have terms lasting 15 or 30 years. Throughout those years, the interest rate and monthly payments remain the same. You would select this type of loan when you:
2) Adjustable Rate Mortgage
Adjustable Rate Mortgages (often called ARMs) typically last for 15 or 30 years, just like fixed rate mortgages. But during those years, the interest rate on the loan may go up or down. Monthly payments increase or decrease. You would select this type of loan when you:
3) Combination Rate Mortgage
Combination rate mortgages combine fixed interest rates and adjustable interest rates. Lenders often refer to these loans as hybrid loans. For the first few years (3-7), the interest rate is fixed. It remains the same and so does your monthly payment. During the remaining years of the loan, your interest rate becomes adjustable and can vary. You would select this type of loan when you:
In selecting the best loan program, it is helpful to understand the relationship between rates and points. Points are considered to be prepaid interest and are tax deductible. Each point is equal to one percent of the loan amount. So for example 1 point on a $250,000 loan is $2,500. The more points you pay, the lower the rate you will get.
By carefully considering the above factors and seeking our professional advice, you should be able to select the one loan that matches your present condition as well as your future financial goals.