The interest rate is adjusted up or down periodically based on a financial market index (such as treasury bills). Monthly payments start lower than for fixed-rate mortgages. The initial rate is set for a specified period -- 1, 3, 5, 7, or 10 years -- and then rates adjust on a schedule, say, annually. The adjustments generally are limited by annual caps and a life-of-the-loan cap.
Fixed-Rate 30-Year Conventional Mortgage
A fixed-rate conventional loan is made by a commercial lender for 30 years. Monthly payments (excluding taxes) remain unchanged for the life of the loan. Most lenders allow mortgages with as little as 5% down, but require private mortgage insurance for loans with less than 20% down.
|Fixed-Rate 15-Year Conventional Mortgage|
This is similar to the 30-year conventional mortgage, except the loan is repaid in half the time. Interest rates are typically lower than for a 30-year loan, and interest paid over the life of the loan is less, but the monthly payments are usually slightly higher. Government-backed loans -- VA and FHA -- are also available in 15-year terms.
This 30-year loan is a cross between the ARM and a conventional loan. The mortgage carries a fixed rate for 5, 7 or 10 years and then adjusts to market interest rates once for the remainder of the loan. The initial rate is generally lower than a fixed-rate conventional mortgage, but the second step of the two-step mortgage is often conditional on the lender's approval.
|Federal Housing Authority (FHA) Loan|
These are government-insured loans so homeowners can make a smaller down payment than on conventional loans. The limits on FHA loans are high enough to handle moderately priced homes in many parts of the country. FHA loans are assumable for future buyers who qualify.
These are loans for qualified veterans backed by the Department of Veterans Affairs with low or no down payment required. These mortgages are subject to the VA mortgage funding fee, a premium of up to 1% of the loan amount, depending on the size of the down payment. VA loans can be combined with second mortgages and are assumable to qualified buyers.
Sellers may take back a loan against their equity in the property in the form of a first or second mortgage. One approach to owner financing is to use a balloon mortgage calculated and repaid for 5 or 7 years as a 30-year mortgage, but then the balance of the loan is due in a lump sum.
A buyer takes over the existing mortgage -- usually FHA, VA or ARM -- at its current interest rate, with the concurrence of the lender. An assumption may have a lower rate than those currently available, and taking over the mortgage may save on closing costs. The down payment makes up the difference between the sales price and the balance on the loan.
Here a new mortgage incorporates an older, assumable loan to help bridge the gap between the loan balance and home sales price. The interest rate is often below market, but higher than the rate the old mortgage carries. Payments are made to the new lender or the seller, who forwards part of the payment to the first lender. The term of the mortgage is the time remaining on the original loan.
|Buy-Down Mortgage Plan|
The seller or a third party provides additional cash to the lender in exchange for a lower interest rate for the buyer. Approaches vary among permanent buy-downs, multi-year and graduated plans.
Ways To Pay For A House Today
Different buyers have different mortgage needs. Fortunately, lenders today offer many mortgage options to choose from. Chances are you'll find a mortgage plan that works for you. Because points, fees and interest rates vary, check with us or your lender for specific information on the type of loan you are considering. The "snapshot" interest rate examples shown here are for illustrative purposes only and may not reflect current rates. For simplicity, all examples here use a $100,000 sales price. Monthly payments are for principal and interest only (taxes, insurance and condo/homeowner fees would increase you payment).