Finding the perfect mortgage to enable a person to buy their dream house is a unique experience that takes research, an in depth knowledge of the available options and a good loan officer who is willing to work with the potential homeowner to find the right mortgage for their needs. Many people are faced with the decision of choosing which mortgage is right for them. In this article one will find information about interest rates and loan types to assist a borrower in making this decision.
Interest rates are an integral part of any type of home mortgage and are essential to choosing the right loan option for a potential homeowner’s needs. It is the type of home loan and the interest rate which blend together to create a monthly mortgage payment and define the status of the loan throughout the time of home ownership. In its most basic definition, interest rates are the cost to borrow the money to purchase a home from lenders or banks. For example, a 4% interest rate will take 4% of the total remaining amount owed each month and repay it to the lender. Interest rates usually fall within three unique categories.
- Fixed Rates
Fixed interest rates are home mortgage loan rates that are defined to stay at a certain percentage for a fixed amount of time. Typically these rates remain stagnant for two to five years and it is during that time that rate percentages are guaranteed not to fluctuate or change. To continue the use of the 4% example, with a fixed rate home mortgage loan, the 4% interest will remain the same for a defined amount of time, let’s say 5 years. Once the five year period is up, the interest rate may change, resulting in high or lower rate percentages, usually set to the lender’s standard variable rate (SVR.) However, some lenders offer fixed rates for the lifetime of a loan, resulting in lower interest rates on all mortgage payments for 15 to 30 years.
- Discount Rates
Discounted interest rates are typically used to engage homeowners in new mortgage deals and are set for a brief period of time. After the promotional time period is over, the rates will conventionally revert back to the lender’s SVR which can be subject to change, but will traditionally offer a few weeks’ notice before crossing over to another interest rate percentage.
- Adjustable-Rate Mortgages (ARMs)
Just as the name suggests, ARM interest rates are rate percentages that rise or fall throughout the term of a loan. In most cases, they will start off with a lowered percentage than that offered with a fixed interest rate, but over time Adjustable-Rate Interest percentages can rise to be quite high depending on the lender.
Types of Loans
Interest rates blend together with the different types of home loans to offer homeowners the best option for their monthly payments and years of holding a loan. To decide on the perfect loan, potential homeowners will need to evaluate present circumstances, financial goals, and possible future earnings. Different types of home loans can include:
- VA Home Loans
Veteran Administration (VA) home loans are home loan options for American military veterans which offer a zero down payment option with fixed interest rates. There are two classes of VA home loans and those are conventional VA home loans and VA Streamline loans.
- FHA Home Loan
FHA home loans are a government subsidized home loan that requires a low down payment (traditionally 5% of the home loan) and is guaranteed by the government to lenders.
- Conventional Home Loans
Conventional loans are considered home loans which are not government backed like the VA or FHA home loan options. Conventional loans rely heavily on credit scores of an individual home buyer and offer more options in the length of a loan and interest rates as well as the option to opt out of mortgage insurance.
The Right Mortgage
Finding the perfect mortgage can enable a person to buy their dream house and it is through an understanding of different loan interest rates and the unique types of loans available that the potential homeowner can indeed start the process of owning their dream house.