Finding the Mortgage Loan That is Right for You
If you are planning on buying a home it is good to educate yourself about the various home mortgage loan options so you can choose the loan that is best for you.
The two main types of loans are fixed-rate mortgage loans and adjustable-rate mortgage loans.
If you have an adjustable-rate mortgage (ARM) your interest rate will adjust periodically during the term of the loan. The interest rate on a fixed-rate mortgage never changes and thus the homeowner’s monthly mortgage payment amount never changes.
With an adjustable-rate mortgage loan the interest rate will typically be fixed for an initial period (e.g., 3, 5, or 7 years) and then will become adjustable, moving either up or down at each readjustment period. These readjustments may occur monthly, semi-annually, or annually.
An FHA mortgage loan is insured by the U.S. government and provided through the Federal Housing Administration. An FHA loan is an ideal type of mortgage loan for a first-time home buyer since it requires a relatively low down payment, and FICO scores are not considered.
A VA mortgage loan is a government loan funded by a conventional lender and guaranteed by the U.S. government through the Veteran’s Administration. VA loans are only for veterans of the U.S. Armed Services, and also spouses of deceased veterans. No down payment is required for a VA loan.
An interest-only mortgage requires the borrower to pay only the interest on the loan for a certain period of time, while not repaying any of the principal. At maturity the borrower is required to repay the full balance of the loan.
One of the most complicated types of mortgages is the option ARM which is an adjustable-rate mortgage with a fluctuating interest rate, allowing the borrower to choose from different payment options.
Option ARMs may be suitable for someone whose income fluctuates, though if a borrower makes only minimum payments it may result in a negative amortization and loss of equity in the home.
Mortgage financing for a home may also consist of two separate loans known as the first mortgage and second mortgage. This is sometimes done to avoid paying private mortgage insurance when the borrower has a down payment that is less than twenty percent of the purchase price.
A mortgage buydown is used by borrowers wishing to have a lower interest rate on their mortgage loan. This lower interest rate is made possible by fees (the buydown) that are paid by either the buyer, seller, or lender, in order to achieve the lower interest rate.
There are also various other types of specialty mortgage loans used for specific situations For example a bridge loan (also called a swing loan) may be used by a seller with a home on the market who wants to borrow money to buy another home. In this case the existing house would serve as security for the bridge loan.
Borrowers wanting cash may take out an home equity mortgage loan that is second (junior) in position to their first mortgage, and provides a line of credit from which funds may be drawn when needed. Home equity loans are often taken out to complete home improvements.
In a reverse mortgage, which is available to those age 62 or older, the lender makes monthly payments to the homeowner (borrower) as long as the borrower remains in the home. Reverse mortgages may be either fixed-rate or adjustable rate.
If you are planning on buying a home on Kauai, first determine your home buying budget. Then you can learn about the pros and cons of different types of mortgage loans to determine which home loan is best for you.
There are various factors to consider when deciding on the type of mortgage loan for your particular situation including how long you intend to live in the home, your current and anticipated income, how much you are eligible to borrow, what interest rate you will be offered based upon the amount of your down payment, your credit score, and other factors.
For more information about buying a home on Kauai please free to give us a call. The Bali Hai Realty staff will be happy to help you find the perfect Kauai home and answer your questions about the Kauai home buying process.