No matter what your mortgage needs may be, there is an appropriate loan available for you. Use this handy guide to help understand the different types of mortgages available to homebuyers.
A fixed-rate mortgage will lock you into one interest rate for the entire term of your mortgage. The benefit of this is monthly payment security over the length of your mortgage. However, if interest rates drop, and you want to take advantage of lower rates, you will have to refinance your loan to change your interest rate.
Adjustable-Rate Mortgages (ARMs)
An adjustable rate mortgage typically adjusts the loan’s interest rate once a year, and locks into that rate for the entirety of the year. ARMs are generally riskier because the payments can go up depending on interest rates. The goal of an ARM is to take advantage of the lowest interest rates available, assuming your income may increase over time as the interest rate potentially adjusts upward.
- One Year ARM: A one-year adjustable rate mortgage changes on the anniversary of the loan every year.
An intermediate or hybrid mortgage starts as a fixed rate mortgage for a number of years, and then becomes adjustable.
- 10/1 ARM: In this ARM, the interest rate is fixed for the first 10 years of the loan, and then becomes adjustable every year going forward.
- 5/1 ARM: This works the same as a 10/1 ARM, but the loan would become adjustable after 5 years.
A convertible ARM will allow you to switch from an adjustable rate mortgage to a fixed rate mortgage. There are usually some restrictions, like only being able to lock in within the first 5 years. This is different from refinancing, because you will not have the option to adjust again, but instead will be locked in. Locking in to a fixed rate may incur a penalty or have a fee associated with it.
Jumbo loans are the main way to buy an expensive or luxury home. You will generally need to have excellent credit, an acceptable debt-to-income ratio to support a large loan, and the down payment will be substantial because of the cost of the home.
Payments made on a balloon mortgage will typically be lower than average, and in some cases will only be interest payments. However, the majority of the principal will be paid at the end of the term. This results in a very large payment at the end of a relatively short term. These mortgages are typically taken out commercially, and are taken out by those planning to sell a property in the near future.
VA Home Loans
A loan with zero down payment offered only to veterans. The down payment for a VA home loan is assisted by the VA.
Federal Housing Administration Loans (FHA)
A government-subsidized loan that requires a relatively small down payment of about 3.5%. This loan is good for first time home buyers, those that can’t afford a regular down payment, or those with poor credit. If you can afford a 5% down payment, go with a conventional loan to get a better interest rate.
NOTE: The information provided here is generic in nature and may not represent the full scope of loan offerings available at Pentucket Bank.