If you’re considering buying a home in Indianapolis, chances are one of the main issues you will need to address is choosing a mortgage loan. A couple of years ago, at the peak of the real estate boom, someone could easily have been overwhelmed by all the choices available for home financing. However, due to tighter mortgage restrictions, lenders have reduced their product offerings to consumers. Today, there are still a variety of mortgage options, but more recently have returned to safe and sensible home financing levels. This list doesn’t include every type of mortgage, just the more common mortgage types available for Indianapolis home buyers.
As the name implies, a fixed-rate mortgage is a loan that keeps the same [fixed] interest rate through the entire life of the loan. Because the mortgage rate never changes, the mortgage payment is the same every month. This is why real estate professionals believe this mortgage type is the best for first-time home buyers. Borrowers are usually offered fixed-rate mortgages in 10, 15, 20, or the most popular, 30-year terms. 30-year mortgages are the most popular because they make the borrower’s payment the lowest, compared to the others. Furthermore, with mortgage rates hitting their lowest levels in decades, fixed-rate mortgages are probably the best choice for a mortgage loan at this point in time.
Adjustable-rate mortgages, or ARMs for short, are tied to the one-year constant-maturity Treasury bill. So, unlike fixed-rate mortgages, adjustable-rate mortgages change every year. Also, most ARMs used today are referred to as “hybrid ARM” loans. They’re referred to this because they are actually fixed-rate loans, but fixed for only a portion of the whole term. Mortgage lenders offer different hybrid ARM loans, but the most popular is a “5/1 ARM loan.” This mortgage type has a 30-year term, with a fixed interest rate for the first 5-years. After the first 5-years, the rate begins adjusting to the index it is tied to. Overall, the interest rate on an ARM is lower than a traditional fixed-rate mortgage. However, the downside is that you can never predict the interest rate it will adjust to after the introductory period.
Government Insured Mortgages
Government insured mortgages are loans insured by some type of federal agency. These are mortgage types the government agrees to pay if the home owner stops making payments. There are three main governmental programs that offer government insured mortgages: Federal Housing Administration (FHA), the Department of Veterans’ Affairs (VA), and the United States Department of Agriculture (USDA)
The FHA loan is a fixed-rate mortgage that is designed specifically for a first-time home buyer of moderate or low income, guaranteed by the Federal Housing Administration. This mortgage type can be easier to qualify for than a traditional fixed-rate mortgage and allow a smaller down payment, generally 3%. On the other hand, these mortgages are not for everyone – you can only qualify for this mortgage if you use the property as your primary residence (i.e. can’t use for investment purposes and/or your vacation home). Also, it’s important to know, FHA mortgages usually have higher interest rates compared to traditional conventional loans, and have higher insurance costs too.
VA guaranteed mortgages are only for home owners who are eligible veterans and their families. Eligibility is based on days of active duty and other service requirements. With VA guaranteed loans, there is no monthly premium for mortgage insurance. However, there may be a funding fee, which is typically 2% of the loan amount with no down payment.
USDA loans, which used to be called RHA loans (Rural Housing Administration), are only eligible for people who live in certain parts of the country and meet certain household income guidelines. USDA used to be called “farmer loans” because the subject property was, and still is, required to be located in an eligible rural area. The benefits of a USDA loan include: no down payment, low fixed rates, no PMI, no maximum purchase price, and many more. USDA loans probably won’t be an option for most Indianapolis home buyers.
Interest Only Mortgages
These are loans that allow the borrower to pay only the interest on the loan for a predetermined time. Once the interest only time period expires, the mortgage payments increase to include repayment of the principal, and are steeper than a standard loan. The longer the interest only period, the higher the payments will rise after its expiration. This mortgage type is intended to be a short-term solution to your refinancing needs (i.e. save yourself from foreclosure), and have the potential for misuse.
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