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Types of Loans

While the mortgage market has become more restrictive in the last several years, there are still a wide variety of mortgages to choose from. It is in your best interest to investigate each of them to determine which is the best for your situation. You may not qualify for all of them, but if you do qualify for more than one, you may save yourself money if you research the advantages and disadvantages of each type of mortgage.

Fixed Rate Mortgages

Consider a fixed rate mortgage if either of the following describes you:

  • You plan on living in your new home for many years, and/or
  • You are not a risk-taker and prefer the stability of knowing how much your payment will be each month.

Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner, but will not reduce your monthly obligation.

This may not always be the best choice, however. If interest rates are high at the time you take out your loan, with a fixed rate mortgage you will be making payments based on the high rate of interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you'll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.

The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:

15-Year Fixed-Rate:

  • Pay off the loan in half the time of a 30-year loan.
  • Equity builds up more quickly than in a 30-year loan.
  • Payments are higher.

20-Year Fixed-Rate:

  • Pay off the loan in 2/3 the time of a 30-year loan.
  • The overall interest paid is considerably less than for a 30-year loan.

30-Year Fixed-Rate:

  • The most common choice, especially for first-time homebuyers, as it's the easiest of the fixed-rate loans to qualify for.
  • Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of "padding" between the amount you can afford to spend and the monthly payment for your desired property.
  • More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
  • For income tax purposes, this term provides the maximum interest deduction.To

To determine how much your mortgage payment would be with a fixed rate mortgage, click http://www.klrealtors.com/calculator.php.

Adjustable-Rate Mortgages (ARMs)

If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate.

Generally, the interest rate when you take out an ARM will be lower than a fixed-rate mortgage, but long-term, this is subject to change.

Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income is not sufficient to cover the highest possible payments, then this option is not for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up.

Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate]) and your payment will be based on the index your lender uses plus a margin, generally of two to three points. Get the formula used by your lender in writing and make sure you understand what it means.

Fortunately, the amount an ARM can increase is limited. There are "caps" on how much your lender can increase your rate, both for a period of one year and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you'll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.

Convertible ARMs

If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.

Government Loans

Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.

VA Loans

Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.

FHA Loans

The Federal Housing Association offers loans to lower-income Americans. Look for the phrase "FHA approved" when looking at ads for homes.

Jumbo Loans

Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.

If you are looking for a jumbo loan and need more information or advice, we invite you to take advantage of our database of the most competitive lenders available. Just complete a short loan request form and the best lenders in your local area will contact you with their rates and fees.

Rural Development

Single Family Housing Programs provide homeownership opportunities to low- and moderate-income rural Americans through several loan, grant, and loan guarantee programs. The programs also make funding available to individuals to finance vital improvements necessary to make their homes decent, safe, and sanitary.

Rural Housing Guaranteed Loan

Applicants for loans may have an income of up to 115% of the median income for the area. Area income limits for this program are here. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must have reasonable credit histories.

Rural Housing Direct Loan

Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to acquire, build (including funds to purchase and prepare sites and to provide water and sewage facilities), repair, renovate or relocate a home.

Gift of Green

The Gift of Green really is a gift - it will not be added to the loan amount and does not need to be paid back.

If you haven't owned your own home in the past 3 years, you may qualify for MaineHousing's Gift of Green:

  • A grant of $2,500 to help with the cash needed for closing, such as any required down payment, closing costs, and prepaids.
  • A coupon worth up to $500 for a 2-part home energy audit.

Because the Gift of Green promotion is part of MaineHousing's mortgage program, you also may be able to use the Purchase Plus Improvement Option to fund home energy improvements as part of your mortgage.

MaineHousing mortgages even come with payment protection for unemployment.

Getting the Best Rates for Your Mortgage

Naturally, you want to get the best deal for the least amount of money. This holds true for mortgage rates as well.

A lower interest rate means a lower monthly mortgage payment, which can save you money in the long run. Also, it is easier to qualify for a lower payment than a higher one.

Rates change quickly. That great rate you find today might not be there tomorrow. Once you find the rate you are looking for, submit a loan application and lock in that rate.

Some sources or interest rates on the Internet include:

Bank Rate Monitor (http://www.bankrate.com)

                  E-Loan (http://www.eloan.com)

When comparing loans, make sure that you're comparing loans of the same type. For eample, you find that "Loan A" for a 30-year loan has a much lower interest rate than "Loan B" (also for 30 years). Upon further inspection, you find that "Loan A" is technically an adjustable rate mortgage. Its payment is based on a 30-year amortization, but becomes due through either payment or refinancing at the end of 5 or 7 years. These are frequently referred to as a 5-year or 7-year fixed-rate mortgage. While both said "30-year", they are not the same type of loan.

Ask the lender for a statement detailing all fees associated with the loan. Factors such as "points" (loan fee), interest rate and "garbage fees" (extra fees which some lenders charge) can vary greatly from one lender to another.

When you are ready to start the loan process, be prepared to provide the following documents as they will likely be required by the lender:

  • Original W-2 (2 years) and current month paystubs.
  • Last 12 months mortgage or rental history (cancelled checks)
  • Employment addresses (2 year history)
  • Contract of sale and legal description
  • Last three months of bank statements
  • Details of any loans you have outstanding
  • Summary of any real estate you own, including address, approximate value, and loans against
  • If self-employed, 2 years tax returns and year-to-date Profit & Loss
  • Previous year tax returns
  • Social security numbers