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Mortgage Basics

There are many different mortgage options available. The descriptions below only briefly describe some of the most popular ones. To be sure that you choose the mortgage that best fits your specific situation contact an experienced professional that knows your local market.

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Fixed-Rate Mortgages

30-Year Fixed-Rate Mortgage

This is the most common mortgage option. The borrower has 30 years to pay it back at a fixed interest rate and the payments stay the same over the life of the loan. Homeowners often choose the 30-year fixed-rate mortgages because the payments are “fixed” and predictable, allowing for easier budgeting and planning. Plus, the payment is lower than that of a 15-year fixed-rate mortgage.

Minimum Down Payment: 5%

Upside: No surprises! The interest rate stays the same over the entire term.

Downside: If interest rates fall, you could be stuck paying a higher rate. If you find yourself in this situation, refinancing your mortgage may make financial sense. 

25-Year Fixed-Rate Mortgage

Instead of the typical 30 year mortgage, a 25-year fixed-rate mortgage can help you build equity in your home faster and perhaps even get a lower interest rate. A 25-year fixed-rate mortgage is fully amortized, or paid off, after 25 years as long as no changes have been made to the terms of the loan. THe obvious downside is slightly higher monthly payment.  Since you are paying off the loan faster than a 30-year mortgage, the monthly payments are higher. However, a 25-year fixed-rate mortgage may be a good compromise for someone wanting to build equity quickly, but not wanting the steep payments of a shorter term loan.

Upside: The interest rate is typically the same as a 30-year fixed-rate mortgage and stays the same over the entire term and you pay a lot less in interest over the life of the loan. A 25-year fixed-rate mortgage will also build equity faster than a 30-year fixed-rate mortgage.

Downside: Your payments will be slightly higher than a longer-term loan.

20-Year Fixed-Rate Mortgage

Like the 25-year fixe-rate mortgage, the 20-year fixed-rate mortgage also lets you build equity in your home faster often with a lower interest rate.  

Upside: The interest rate is typically a little lower that the 25-year or 30-year fixed-rate mortgage and stays the same over the entire term and you pay a lot less in interest over the life of the loan.

Downside: Your payments will be slightly higher than a longer-term loan.

15-Year Fixed-Rate Mortgage

The 15-year fixed-rate mortgage enables you to own your home in half the usual time. Because the loan is shorter, you pay a lot less in the total interest over the life of the loan, often less than half the total interest of a 30-year fixed-rate loan. However, because the term is shorter, the monthly payments are higher. But if you can afford the higher payments, this is a great choice, with lower total costs and a shorter term.

Minimum Down Payment: 5%

Upside: No surprises! The interest rate stays the same over the entire term and you pay a lot less in interest over the life of the loan.

Downside: Like any fixed-rate loan, if interest rates fall, you could be stuck with a higher rate. Qualification for this type of loan may also be more difficult because the income requirement is often higher. If you find yourself in this situation, refinancing your mortgage may make financial sense. Learn more at ShouldIRefi.com.

10-Year Fixed Rate Mortgage

The 10-year fixed-rate mortgage puts equity building in the fast lane. And because the loan is shorter, you pay a lot less in the total interest over the life of the loan, often more than a third of the total interest of a 15-year fixed-rate loan. However, because the term is shorter, the monthly payments are higher. But if you can afford the higher payments, this is a great choice, with lower total costs and a shorter term.

Upside: Fast equity building and no surprises! The interest rate stays the same over the entire term and you pay a lot less in interest over the life of the loan.

Downside: Like any fixed-rate loan, if interest rates fall, you could be stuck with a higher rate. Qualification for this type of loan may also be more difficult because the income requirement is often higher. If you find yourself in this situation, refinancing your mortgage may make financial sense. Learn more at ShouldIRefi.com.


The Adjustable Rate Mortgage (ARM)

Adjustable-rate mortgages usually offer lower interest rates and mortgage payments at first because the borrower assumes the risk of changes in interest rates. Borrowers choose ARMs because the lower initial payment makes the home more affordable at first, but the borrower must be willing to accept the risk of an increased mortgage payment, which can sometimes be significantly higher.

Types of ARMs: 3-year, 5-year, 7-year, 10-year amoritized over 30-years

Minimum Down Payment: 5%

Upside: An ARM usually offers a lower initial rate of interest than fixed-rate loans.  

Downside: After an initial period, rates fluctuate over the life of the loan. When interest rates rise, generally so do the loan payments. If you find yourself in this situation, refinancing your mortgage may make financial sense. Learn more at ShouldIRefi.com.


FHA Loan

An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). The federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments. The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930s. THE FHA provides mortgage lenders with adequate insurance and helps stimulate the housing market by making loans accessible and affordable. FHA loans are popular with first-time homebuyers.

Minimum Down Payment: 3.5% or if you are purchasing a HUD owned home, you may qualify for HUD's $100 down program which allows you to purchase a HUD owned home with an FHA mortgage with only $100 down.

Upside: An FHA loan allows buyers who may not qualify for a home loan to obtain one low down payment.        

Downside: The size of your loan may be limited.


VA Loan

A VA loan is a home loan available to consumers who have served or are presently serving in the U.S. military. While the Department of Veterans Affairs (VA) does not lend money for VA loans, it backs loans made by private lenders to veterans, active-duty personnel, reservists and surviving spouses who qualify.

Upside: VA loans offer competitive rates with low or no down payments and are guaranteed for eligible veterans, active duty personnel, and surviving spouses.

Downside: The size of your loan may be limited.


Guaranteed Rural Housing Loan Program

Property location and income limit restrictions. Ask your local mortgage pro for details.

Upside: No down payment.

Downside: Most properties that are eligible are located outside of metro areas.


Refinance Loan

A refinance loan allows you to get a new mortgage to reduce your monthly payments, lower your interest rates, reduce your loan term, consolidate debt, or take cash out of your home. Most people refinance when they have equity on their home but there are currently no equity requirements on HARP refinance loan programs, and most FHA to FHA, VA to VA (IRRL), or Guaranteed Rural Housing to Guaranteed Rural Housing refinances.  Learn more and connect with a local mortgage professional in your area at ShouldIRefi.com.

Upside: A refinance loan can reduce interest rate and lower payments and/or get money from your home for large purchases such as cars or to reduce credit card debt.

Downside: Ask your local mortgage pro for details. As long as your mortgage professional has done a thorough analysis of your situation and the refinance provides a financial benefit, there should be no downside to refinancing.


Reverse Mortgage

A reverse mortgage is a loan that lets homeowners over the age of 62 convert a portion of the equity in their home into income. These mortgages offer seniors an option to pay for a variety of expenses and have become increasingly popular as more baby boomers enter or near retirement. Reverse mortgages loans are secured by the home and the homeowner doesn’t have to repay the loan until they die, sell or move out of the home.

Upside: Reverse mortgages allow seniors to convert equity in their homes to cash and you don’t have to pay back the loan and interest as long as you live in the house.           

Downside: This type of loan can be subject to aggressive lending practices and false advertising promises, particularly by lenders that prey on seniors. Only work with trusted local lenders and check to make sure the loan is Federally insured.

Learn more about reverse mortgages at ShouldIReverseMortgage.com.


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