Deciding on the Mortgage Loan that is Best for You


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Depending on where you are as an informed consumer, you may be aware of the different types of real estate mortgage loans now available on the market. However, being aware that there are a variety of mortgage financing programs and having to decide on one that may be best for your own purposes could be two different things.

It isn’t always easy to decide which type of mortgage loan will be most beneficial to you. All the possibilities opened to you are different and will provide different levels of benefits. So before jumping into a mortgage loan, you want to make sure you have evaluated your individual needs, keeping in mind that the main idea behind a mortgage loan is to help you financially in more than one way.

Let’s take a look at a few of the available mortgage types and an example of what each would mean to you, as well as what you have to bring to the table in order to take advantage of the particular mortgage type.

First is the Traditional or Conventional mortgage. This mortgage type does not require third-party mortgage insurance (e.g. PMI), and comes with the very best rates on the 30 year and 15 year fixed versions. To qualify for this type of mortgage you will need a minimum 20% down payment, great to pristine credit and a stable employment history with and highest qualifying income of all mortgage types listed..

Second is the type of financing known as the PMI (Private Mortgage Insurnce) mortgage. This mortgage type, although having the same qualifying guidelines in terms of credit, employment history and income, does require third-party insurance (thus the title PMI), thereby eliminating the need for a 20% (of the purchase price) down payment, but instead allow you, the borrower, to make a down payment of as little as 5%.

The additional 15% that would otherwise be required on the first mortgage type will be insured by the PMI company on the second mortgage type. The borrower will need everything required for a conventional mortgage loan except the full 20% down payment but will pay an increased monthly fee to cover the PMI premium.

Third is a mortgage loan insured by the Federal Housing Administration and is therefore referred to as a FHA-insured mortgage. Qualification requirements for this type of mortgage are, a “satisfactory” credit profile, minimum down payment of 3.5% (of the purchase price), and 2 consecutive years employment. What you must bring to the table is reasonable explanation(s) for any credit report blemishes, proof of sufficient enough cash to make the purchase as well as enough monthly income to cover mortgage repayments and credit obligations.

Fourth is a VA mortgage. This type of mortgage is guaranteed by the VA (Veterans Administration) and is restricted to veterans of the US Armed Services and their spouses. If you are a veteran and can present a Certificate of Eligibility, a “reasonable” credit profile and stable employment history, you will not be required to make a down payment, but you will have to pay settlement charges (closing costs) to complete your purchase.

The Adjustable Rate Mortgage (ARM) is not separate from Conventional, PMI, FHA and VA, but is an option available to mortgage borrowers qualifying for a mortgage under any of the programs mentioned, but is less popular among FHA and VA borrowers who primarily opt for a fixed term (15 year or 30 year terms) mortgage. There are different variations of the ARM, ranging from a 1 year ARM to a 7 year or 10 year ARM (referred to as a 10 year fixed rate mortgage in some cases).


The initial interest rate on the ARM is usually lower than that of a fixed rate mortgage, but at some point after the first, third, fifth or seventh year that rate will be adjusted to a higher or lower rate, depending on market rates at time of adjustment, but will not exceed the built-in cap for the particular mortgage type.

Once you are aware of the types of mortgage financing available and which will best suit your purposes, you’ll be able to select your home with the confidence in knowing exactly what type of home you want to buy, where you want to buy it and for how much you want to buy it. In fact, you may be able to select a mortgage type based on how long you plan to stay in a particular home. They will be a number of options available to you that did not seem to exist prior to availing yourself of good, usable information.

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Simple Mortgage Choices – Fixed ARM Or Hybrid


Under what circumstances in today’s mortgage market would the fixed, ARM, or hybrid mortgage be best utilized? While the decision to purchase a home is no doubt a major step based on the importance and size of the item being purchased, as well as on the fact that it is one of the few items which requires borrowed money in order to complete the purchase, the decision you will make on the best way to finance this kind of purchase must also be one of the most important decisions you will make.

However, your decision regarding the mortgage type that best suits your home purchase may not be the same after you become a homeowner and you wish to re-finance your home. Whether you are purchasing or want to refinance, the list of available mortgage types you would most likely be selecting from includes a fixed rate mortgage, an adjustable rate mortgage (ARM) or a hybrid mortgage which combines the two options.

The names are pretty much self explanatory but basically a fixed rate mortgage is a mortgage where the interest rate remains constant and an ARM is a mortgage where the interest rate varies. The ARM interest rate varies up and down based on an index such as the treasury 1-year, 3-year, 5-year or 7-year note or the 10-year T-Bill. However there are usually clauses which prevent the interest rate from rising or dropping dramatically during a specific period of time. This safety clause provides protection for both the homeowner and the lender.

Advantages of a Fixed Option

A fixed rate option is ideal for home buyers or refinancing homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are able to retain makes it worthwhile for the home buyer/homeowner to borrow at the newest, lowest interest rate. The major advantage to this type of financing option is stability. Home buyers/homeowners who finance with a fixed mortgage rate do not have to be concerned about payment variations during the life of the mortgage, thus the term “fixed rate”.

Disadvantages of a Fixed Option

Although the ability to lock in a favorable interest rate is an advantage it can also be considered a disadvantage. This is because home buyers who obtain a prevailing market interest rate at the time of purchase will not be able to take advantage of subsequent interest rate drops unless they re-finance. And every subsequent refinance will result in the homeowner incurring additional closing costs.

Advantages of an ARM Option

An ARM is favorable in situations where the interest rate is expected to drop in the near future. Home buyers and homeowners who are skilled at predicting trends in the economy and interest rates may consider financing with an ARM if they expect the rates to drop during the course of the loan period. However, interest rates are tied to a number of different factors and may rise unexpectedly at any time despite the predictions by industry experts.

A mortgage consumer who can reasonably predict the interest rate markets would be able to determine whether or not an ARM is the best financing option. However, since this is not possible for most home buyers and homeowners, they will have to either rely on their instincts and hope for the best or select a less risky option such as a fixed interest rate.

Disadvantages of an ARM Option

The most obvious disadvantage to financing with an ARM is that interest rates may rise significantly and unexpectedly. In these situations the homeowner may suddenly find themselves paying significantly more each month to compensate for the higher interest rates. While this is a disadvantage, there are some elements of protection for both the homeowner and the lender. This often comes in the form of a clause in the terms of the mortgage contract which prevents the interest rate from being raised or lowered by a certain percentage over a specific period of time.

Consider a Hybrid Financing Option

Home buyers and homeowners who are undecided and find certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing might consider a hybrid re-financing option. A hybrid loans is one which combines both fixed interest rate features and features of adjustable interest rates. This is often done by offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM.

In this option, lenders typically offer introductory interest rates which are extremely enticing to encourage homeowners to choose this option. A hybrid loan may also work in the opposite way by offering an ARM for a certain amount of time and then converting the mortgage to a fixed rate mortgage. This version can be quite risky as the homeowner may find the interest rates at the conclusion of the introductory period are not favorable to the him/her.

The 30 Year Fixed Rate Mortgage – Still Your Best Option?


During my years as a real estate broker and mortgage lender representative, the 30 year fixed rate mortgage was the best option for most first time home buyers, and in many cases, home owners who were refinancing. This was true for a number of reasons, most important of which, was the lower monthly payments based on a longer term. The 30 year fixed rate mortgage was, at that time, the most popular FHA-insured mortgage type and FHA mortgages were the mortgage of choice in most markets where I did business.

However, the 30 year fixed rate mortgage was also the first choice of most conventional borrowers for some of the same reasons. The total payments were spread over a longer period of time with the interest rate set for the entire term of the mortgage. That having been said, is the 30 year mortgage still an industry standard, and does it meet the specific needs of today’s mortgage borrower? Since your financing needs are, in many cases, very unique you may wish to choose a different mortgage type.

There have been many changes in the real estate and mortgage market over the last 4 years – brought on primarily by the subprime mortgage meltdown – but even if the 30 year home loan is still an industry standard, is it the right choice for you? The answer to this question will depend on a couple of factors. If, for example, you intend to sell your home within a 5 to 7 year period it may be best to take advantage of the lower rate 5 or 7 year ARM (Adjustable Rate Mortgage) because since the total payments on a 30 year mortgage are spread over a longer period of time and the interest rate set for the entire time of the mortgage, the interest rate carried on it is higher than that on an ARM.

As we mentioned, the plus side for a 30 year home loan is lower monthly payments. This attraction is somewhat dimmed by the fact that you pay $1000s extra in interest; But, your interest is 100% tax deductible (unless the US Congress changes this feature as they may be contemplating) which does lower your after-tax cost.

It offers you some flexibility so that if your financial situation changes and you have more money you can pay it off in less than 30 years, this while keeping the low monthly payments. Your payments are smaller so, in reality, you can purchase a larger roomier home. To show an example of the interest difference between 30 year home loan rates and one of the other mortgage types.

On a 30 year, 250,000 dollar loan using 4.5% interest rate your monthly payment of interest and principle would be $1,266.71; But over the next 30 years you will have paid approximately $337,500 in interest alone. Now with a 15 year home loan rate on the same amount, but a lower 15 year rate of 3.5%, you will pay $1,787.21 (principal & interest) per month and over the next 15 term, you would pay $131,250 in interest which would save you approximately $206,250 dollars.

Those numbers suggest that, if you have the will power to invest the savings gained from the lower (30 year mortgage) monthly payments, it still could be a good choice to go with the 30 year mortgage. Especially if you can find an investment that the long term payoff matches or exceeds what you would save in a 15 year mortgage. Another factor to consider is how fast you want to accrue equity in your home or to own it outright. 30 year mortgage loans take much longer for you to build equity.

The 30 mortgage is certainly attractive, and the vast majority of home buyers opted for 30-year loans based on everything that was already said; And although there have been discussion about a 35 or 40 year mortgage, and some lenders have adopted these longer term mortgages, they were never as popular as the 30 year mortgage.

However, there are still many other mortgage financing options to consider, and probably the biggest question you have to ask yourself when considering a mortgage loan is what are your financial goals? What loan plan will help you the most to reach that goal? It is clearly to your advantage to look into other home financing options for the best mortgage available for you and will best accomplish your financial goals. It may surprise you that, because of your personal situation, other plans may be more suitable for you.