Understanding Different Types of Loans

Today's homebuyer has more financing options than have ever been available before. From traditional mortgages to adjustable-rate and hybrid loans, there are financing packages designed to meet the needs of virtually anyone.

While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Though this article discusses some of the more common loan types, you should spend time talking with different lenders before deciding on the right loan for your situation.

General categories of loans
Most loans fall into three major categories: fixed-rate, adjustable-rate, and hybrid loans that combine features of both.

• Fixed-rate mortgages
  As the name implies, a fixed-rate mortgage carries the same interest rate for the life of the loan. Traditionally, fixed-rate mortgages have been the most popular choice among homeowners, because the fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Fixed-rate mortgages are most common in 30-year and 15-year terms, but recently more lenders have begun offering 20-year and 40-year loans.
  
  
• Adjustable-rate mortgages (ARM)
  Adjustable-rate mortgages differ from fixed-rate mortgages in that the interest rate and monthly payment can change over the life of the loan. This is because the interest rate for an ARM is tied to an index (such as Treasury Securities) that may rise or fall over time. In order to protect against dramatic increases in the rate, ARM loans usually have caps that limit the rate from rising above a certain amount between adjustments (i.e. no more than 2 percent a year), as well as a ceiling on how much the rate can go up during the life of the loan (i.e. no more than 6 percent). With these protections and low introductory rates, ARM loans have become the most widely accepted alternative to fixed-rate mortgages.
  
  
• Hybrid loans
  Hybrid loans combine features of both fixed-rate and adjustable-rate mortgages. Typically, a hybrid loan may start with a fixed-rate for a certain length of time, and then later convert to an adjustable-rate mortgage. However, be sure to check with your lender and find out how much the rate may increase after the conversion, as some hybrid loans do not have interest rate caps for the first adjustment period.

Other hybrid loans may start with a fixed interest rate for several years, and then later change to another (usually higher) fixed interest rate for the remainder of the loan term. Lenders frequently charge a lower introductory interest rate for hybrid loans vs. a traditional fixed-rate mortgage, which makes hybrid loans attractive to homeowners who desire the stability of a fixed-rate, but only plan to stay in their properties for a short time.

Balloon payments
A balloon payment refers to a loan that has a large, final payment due at the end of the loan. For example, there are currently fixed-rate loans which allow homeowners to make payments based on a 30-year loan, even thought the entire balance of the loan may be due (the balloon payment) after 7 years. As with some hybrid loans, balloon loans may be attractive to homeowners who do not plan to stay in their house more than a short period of time.

Time as a factor in your loan choice
As has been discussed, the length of time you plan to own a property may have a strong influence on the type of loan you choose. For example, if you plan to stay in a home for 10 years or longer, a traditional fixed-rate mortgage may be your best bet. But if you plan on owning a home for a very short period (5 years or less), then the low introductory rate of an adjustable-rate mortgage may make the most financial sense. In general, ARMs have the lowest introductory interest rates, followed by hybrid loans, and then traditional fixed-rate mortgages.

FHA and VA loans
U.S. government loan programs such as those of the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for people who might not otherwise be able to qualify for a conventional loan. Both FHA and VA loans have lower qualifying ratios than conventional loans, and often require smaller or no down payments.

Bear in mind, however, that FHA and VA loans are not issued by the government; rather, the loans are made by private lenders but insured by the U.S. government in case the borrower defaults. Remember too, that while any U.S. citizen may apply for a FHA loan, VA loans are only available to veterans or their spouses and certain government employees.

Conventional loans
A conventional loan is simply a loan offered by a traditional private lender. They may be fixed-rate, adjustable, hybrid or other types. While conventional loans may be harder to qualify for than government-backed loans, they often require less paperwork and typically do not have a maximum allowable amount.

How Mortgage Loans Work

Questions and Answers

How do you choose between buying and renting?

ANSWER:

Home ownership offers tax benefits as well as the freedom to make decisions about your home. An advantage of renting is not worrying about maintenance and other financial obligations associated with owning property.
There also are a number of economic considerations. Unlike renters, home owners who secure a fixed-rate loan can lock in their monthly housing costs and make prudent investment plans knowing these expenses will not increase substantially.
Home ownership is a highly leveraged investment that can yield substantial profit on a nominal front-end investment. However, such returns depend on home-price appreciation.

Do we dig deep and buy a dream home or settle for a starter home?

ANSWER:

Choosing between a smaller house in an affluent neighborhood, an older, bigger house in a more working-class community or a brand-new home is not easy. If you're in this situation, start by examining your priorities and asking the following questions:
* Is the surrounding neighborhood or the home itself the most important consideration?
* Is each of the neighborhoods safe?
* Is quality of the schools an issue?
* Do any of the areas seem to attract more families with children or adult residents? And where do you fit in?
As for the return on your investment, home-price appreciation is hard to predict. In the late 1980s, and again 10 years later, the more expensive move-up housing appreciated wildly. But during the recession that followed, smaller homes tended to hold their value better than more expensive ones.

How do I get the real scoop on homes I am looking at?

ANSWER:

Home inspections, seller disclosure requirements and the agent's experience will help. Disclosure laws vary by state, but in some states, the law requires the seller to complete a real estate transfer disclosure statement. Here is a summary of the things you could expect to see in a disclosure form:
* In the kitchen -- a range, oven, microwave, dishwasher, garbage disposal, trash compactor.
* Safety features such as burglar and fire alarms, smoke detectors, sprinklers, security gate, window screens and intercom.
* The presence of a TV antenna or satellite dish, carport or garage, automatic garage door opener, rain gutters, sump pump.
* Amenities such as a pool or spa, patio or deck, built-in barbeque and fireplaces.
* Type of heating, condition of electrical wiring, gas supply and presence of any external power source, such as solar panels.
* The type of water heater, water supply, sewer system or septic tank also should be disclosed.
Sellers also are required to indicate any significant defects or malfunctions existing in the home's major systems. A checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveway, sidewalks, floors, doors, foundation, as well as the electrical and plumbing systems.
The form also asks sellers to note the presence of environmental hazards, walls or fences shared with adjoining landowners, any encroachments or easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning violations, citations against the property and lawsuits against the seller affecting the property.
Also look for, or ask about, settling, sliding or soil problems, flooding or drainage problems and any major damage resulting from earthquakes, floods or landslides.
People buying a condominium must be told about covenants, codes and restrictions or other deed restrictions.
It's important to note that the simple idea of disclosing defects has broadened significantly in recent years. Many jurisdictions have their own mandated disclosure forms as do many brokers and agents. Also, the home inspection and home warranty industries have grown significantly to accommodate increased demand from cautious buyers. Be sure to ask questions about anything that remains unclear or does not seem to be properly addressed by the forms provided to you.

What about a Buyer's agent?

ANSWER:

In many states, it's now common for an agent to represent the buyers exclusively in the transaction and be paid a commission by the sellers. More and more buyers are going a step further, hiring and paying for their own agent, referred to as buyers brokers.

 Inman News Features