Most banks offer a variety of mortgage options and programs to choose from for potential home buyers. Common mortgages include the standard fixed, balloon and adjustable rate mortgage. Additionally, banks can often issue an after completion loan commitment letter for that a new home under construction, and may even refinance the buyer’s current home.
Standard Fixed Rate Mortgages are usually available to buyers for as little as 11% down. They can be amortized for up to 15 years and feature a fixed interest rate and constant monthly principal and interest payment over the life of the loan. Often, private mortgage insurance may be waived on this loan if a down payment of less than 20% is made and the buyer/s meet a higher qualification standard. And, if a down payment of 20% or more is made, the necessity of private mortgage insurance is eliminated and the real estate tax escrow may be waived.
Adjustable Rate Mortgages (ARM) typically offer a lower initial interest rate with periodic adjustments made to the rate over the remaining life of the mortgage. While amortization can range up to 30 years, the initial rate and payment in the first few years may be lower than a fixed rate mortgage but can fluctuate in subsequent years according to market conditions.
Balloon Mortgages can be issued for a longer initial rate period than an ARM and can have a longer amortization period than the Standard Fixed Rate mortgage. So while a balloon mortgage could be amortized for as long as 30 years, the initial interest rate could be guaranteed for either five, seven or ten years before reset. The major benefits of this loan over the other two are:
· a lower payment due to the lengthened amortization period is an advantage of this particular mortgage. Additionally, and
· a greater period to first interest rate reset (compared to the one or three year ARM’s.)
After-Completion Commitments are written commitments issued to buyers who are building a new home or have a home presently under construction and who have not arranged for permanent financing upon completion. The commitment basically states that the buyer has been approved for a loan, and that the bank agrees to honor the interest rate for the loan for 30 days, free of charge.
So what does all this mean?
One of the first, most important steps to buying a home is finding the right mortgage. Most people require a mortgage in order to buy a home, so finding the best mortgage for your situation is an essential element of such a major financial commitment.
The bottom line: Educate yourself. Talk to your bank. Your agent. It is necessary to understand the different types of loans available, and the pros and cons of each. And Then make sure you consider how long you plan to be in your home, your risk tolerance, and if you expect your income to rise, fall or stay the same.
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