Today’s economy is very different from the economic state of our country five years ago, and with drastic changes in the real estate market as well, choosing the right mortgage is a crucial decision. There are numerous mortgage options available for prospective buyers at the current time; however, figuring out the pros and cons of each mortgage alternative can be a little overwhelming. In an attempt to simplify the process of choosing a mortgage, this article will explain some of the benefits and drawbacks associated with the 5 year ARM, 15 year fixed mortgage, and the 203 FHA mortgage.
Adjustable rate mortgages (ARM’s) are quite popular for buyers looking to purchase a home, without breaking their bank account. An adjustable rate mortgage basically means that the borrower is obtaining a loan with an interest rate that is initially lower than the average interest rate offered in fixed rate mortgages. Where this type of mortgage gets a little risky, is in relation to the future of the loan. This type of loan can be a bit of a risk, in that as interest rates increase, so can the monthly mortgage. Adjustable rate mortgages are really a better option when interest rates are predicted to decrease in the future, not increase. Also, lenders can offer interested home buyers an initial interest rate discount to choose ARM’s. It is important for the borrower to do their homework to ensure that they will be paying enough of a mortgage to cover the monthly interest due. If the initial mortgage is too small, borrowers can end up causing their mortgage balance to increase, since their additional interest is accruing during this time period.
Though some of the drawbacks sound a little scary, there are benefits of ARM’s. The benefits of obtaining an adjustable rate mortgage all center around the lower initial mortgage while the interest rate remains stable. This can often times help a borrower qualify for a higher loan than they would be able to obtain with a fixed rate mortgage. Borrowers also choose ARM’s with the sole purpose of paying off other bills, such as credit cards debts, during the period of time prior to the interest rate changing. This can be a great way to get debts paid, as long as the borrower does not incur more debt during this time.
Though borrowers have numerous options when choosing adjustable rate mortgages, the 5 year ARM is often one of the wisest options. The 5 year ARM is a good balance between the 1 year ARM and the fixed rate mortgage. 5 year ARM’s are beneficial because the interest rate only changes every 5 years. After this time, the interest rate is recalculated and the mortgage is adjusted accordingly. Keep in mind that the interest rates are regulated by the federal government and there are limits as to how much an interest rate can increase in a given period of time. Also, borrowers always have the option to consider refinancing their mortgage after the initial ARM period is completed, should they decide the change in interest rate is too high.
This brings up to the topic of fixed rate mortgages. Fixed rate mortgages are popular because of the stability of the interest rate. There is no risk involved in a fixed rate mortgage, as the borrower understands that their interest rate will remain the same during the duration of their loan. This means that the borrower will have a fairly consistent mortgage, and will only see changes if they have their home insurance or taxes escrowed into the monthly payment. Changes in the cost of home insurance and home taxes will cause changes in the monthly mortgage amount for these individuals. Fixed rate mortgages are much more popular when interest rates are currently already low. One of the main drawbacks with fixed rate mortgages, however, is that borrowers cannot benefit from decreases in interest rates without refinancing, and this can be costly.
Of course, like other loan options, there are numerous types of fixed rate mortgages. Though the 30 year and 15 year mortgages are the most popular, there are 25 year and 20 year mortgages as well. Often times it can be difficult to decide the length of the loan that is best for you. Usually, interest rates on 15 year mortgages are slightly lower than with 30 year mortgages, which can really add up to a lot of money when an additional 15 years of monthly payments are added into the picture. 15 year fixed rate mortgages can also be beneficial for individuals looking to build equity in their home at a rapid rate. Also, many borrowers choose 15 year mortgages because they want to have their home paid for, before they retire from their employment. Of course, the obvious benefit is the financial freedom that comes with paying one’s home off faster, which is an important factor when choosing a 15 year mortgage over a 30 year mortgage.
Just as obvious, however, is the main drawback of a 15 year mortgage. Though the mortgage gets paid off faster, the monthly payment is a great deal more. This can cause strain on the monthly budget and leave less room for recreational spending.
When making a decision about a 15 year mortgage versus a 30 mortgage, an example is often beneficial. If a borrower plans to have a mortgage of $200,000, and using a 5% interest rate for both 15 and 30 years, the interest paid more than doubles as the life of the loan increases from 15 to 30 years. Instead of paying approximately $84,000 in interest, with a 15 year mortgage, borrowers pay approximately $186,000, with a 30 year mortgage. Also, keep in mind that we used the same interest rate for both loans in this example, and as mentioned previously, interest rates are generally lower for 15 year mortgages. It really comes down to whether or not the borrower is willing to sacrifice now, in order to benefit later in life, and delayed gratification is not something everyone enjoys.
Another mortgage option that is increasingly more popular is the 203 FHA mortgage, and it is unique, in and of itself. The 203 FHA loan is special in that it can be obtained as a fixed or adjustable rate mortgage. The key point here, is whether or not the borrower qualifies for this mortgage. The borrower needs to have reasonable credit and stable employment in order to qualify for an FHA loan. Normally, the employment has to have been stable for at least two years, and the borrower’s credit score must be a minimum of 620. But please do not become discouraged if your credit is less than perfect. Borrowers can qualify for FHA loans even if they have had a past bankruptcy or foreclosure, though there has to have been a sufficient length of time between these incidents and the new loan approval.
Of course, like other types of loans, there are multiple types of 203 FHA loans as well. There is the 203b loan, which is a fixed rate mortgage. Generally the borrower must be able to put down a minimum of 3.5% of the home cost in order to qualify for the loan. One good thing is that closing costs can often times be added into the mortgage, alleviating the borrower from having to come up with additional monies for closing. Also with FHA loans the interest rate may be slightly higher than with conventional loans, yet like conventional loans, borrowers can choose to set up their mortgage to be paid back in time spans from 15 to 30 years.
The 203k FHA loan is different from the 203b loan in a couple of major ways. First of all, a borrower can choose an adjustable or fixed rate mortgage with the 203k loan. More importantly, is the option for the borrower to obtain additional loan monies to fix broken things within the home. Because the Federal Housing Administrations (FHA) has such a strong commitment to the revitalization of various communities throughout the country, it allows borrowers to obtain money to make needed repairs in the home. This is extremely rare in that other loans often require the home owner to take out a second mortgage to make repairs. The 203k loan actually lends the borrower money based on the price of the home after the needed repairs have been made, making it a truly unique loan.
In searching for a 203 FHA loan, borrowers will also see the 203c FHA loan, which is for borrowers looking to purchase a condo, and the 203h FHA loan for individuals who have lost their home due to a natural disaster. Individuals looking to qualify for the 203h FHA loan need to make sure that the area in which their home was destroyed was designated a disaster area by the President. This loan is special in that it can be used to rebuild the home involved in the natural disaster, or to purchase a new home.