All You Need To Know About The Types Of Mortgages In Texas
Did you realize that there are various types of mortgages available? In this article, we will discuss the most common options along with the benefits and drawbacks to each.
When it comes to purchasing a house, you may think the only option is a fixed-rate mortgage for 30 years. However, this is not true as there are various mortgage options available. Below is a basic discussion of the 16 types of mortgages – some very common and others quite rare.
1. The Fixed-Rate Mortgage
The fixed-rate mortgage is potentially the most popular and commonly used alternative. Having a set interest rate means one has predictable monthly payments. The payment schedule can be spread over a term ranging from 15 to 30 years. It should be noted that shorter terms are gaining popularity.
- 30-Year Mortgage. Approximately 90% of all homebuyers in 2016 opted for the standard fixed-rate, 30-year mortgage. A longer repayment period makes the payments more affordable and can help buyers organize more affordable monthly payments for expensive properties.
- 20-Year Mortgage. Similar to the 30-year mortgage option, the 20-year mortgage offers fixed rates resulting in consistent monthly payments. Most homebuyers opt to split the difference between short and long terms allowing people to pay off their mortgage sooner. Typically, the 20-year mortgage option has a lower interest rate than the popular 30-year mortgage.
- 15-Year Mortgage. Contrary to popular belief, the payment schedule for a 15-year mortgage is not more costly than the rates for a 30-year mortgage. This type of mortgage offers lower interest rates making them affordable as a short-term mortgage. You would be able to pay off the mortgage in a shorter period without an increase in interest rates.
2. The Adjustable-Rate Mortgage (ARM)
The adjustable-rate mortgage allows for fluctuations in the interest rate. The interest rate will differ according to the type of loan you choose. If interest rates are decreasing, the ARM allows homebuyers to take advantage of this without any refinancing. However, if the interest rates rise, ARMs are surprisingly expensive asking for high payments.
- The Variable Rate Mortgage. Variable-rate mortgages are merely another form of adjustable-rate mortgages. The common factor is that variable-rate mortgages have an adjustment in the rates throughout the loan term. Rates will often change according to the third party’s index rate and the lender’s margin. The rates are adjusted on a set payment schedule regardless of whether payments are made every month, every year or on a longer period. It also caps the maximum amount of interest you will need to pay.
- The Hybrid ARM. A hybrid adjustable-rate mortgage involves a fixed initial rate for a set period of time. The most common hybrids include three years of fixed interest followed by adjustable interest rates. The 5/1 option is similar to the 3/1 option with the difference being a five-year introduction period instead of three years.
- The Option ARM. The option adjustable-rate mortgage option provides borrowers a four monthly payment alterative. The mortgage includes a set minimum payment amount, a 15-year or 30-year amortizing payment schedule, and interest-only payments. In most cases, the option ARM is utilized to achieve a much larger loan than the borrower would typically qualify for.
3. The Balloon Mortgage
Balloon mortgages are paid over a short term, mostly 10 years or less. For the majority of the set term, the balloon mortgage requires low payments and sometimes interest only. At the end of the set term, the full balance of the loan needs to be paid. This can place borrowers in a risky position.
4. The Interest-Only Mortgage
The interest-only mortgage offers borrowers an alternative for a lower monthly repayment schedule over a set period. After this, the individual will need to start paying the principal amount. Balloon mortgages are technically a form of interest-only mortgages; however, it does not require any lump sum payments of principal amounts.
Instead of asking for a lump sum payment, the mortgage allows borrowers to pay interest-only payments over a set period. After this, the individual is required to “make up for lost time” through the payment of more than the principal amount using a standard fixed-rate mortgage schedule.
5. The Reverse Mortgage
The reverse mortgage option is reserved for senior citizens exclusively. Reverse mortgages offer homeowners access to the property’s equity in a loan which can be set up for monthly repayments, withdrawn in a lump sum, or receiving a line of credit.
The reverse mortgage is only available when you need to leave the property. If you leave, even if it is before death, you are required to repay the mortgage amount using the proceeds of the loan. This can reduce the equity on which most seniors depend to fund long-term expenses.
6. The Combination Mortgage
A combination mortgage is useful to avoid any private mortgage insurance or PMI if you cannot pay 20% of the property value. On average, borrowers take out a mortgage for approximately 80% of the property value with another 20% payment on the home value. This is known as an 80/20 combination mortgage loan.
In many cases, the combination mortgage will be more costly than others regarding interest rates. However, if you review mortgage options, the PMI is also highly costly. If you are able to pay off the high-rate 20% quickly, then you can emerge with a beneficial combination mortgage.
7. The Government-Backed Mortgage
To encourage people to purchase homes, the federal government offers borrowers mortgages backed by government authorities. Should the borrower default on the mortgage, a government-backed mortgage provides coverage of the lender’s losses from the government entity.
- The FHA Loan. Federal Housing Administration can back loans and are ideal for first-time homeowners or people with a bad credit score. This type of loan is commonly used for cooperative housing projects, single-family homes, some multi-family houses, and condominiums.
- The USDA Loan. Rural homeownership is highly encouraged using this loan because the US Department of Agriculture offers a specialized mortgage option. The payment schedule is low for people purchasing homes in rural areas.
- The VA Loan. The US Department for Veterans Affairs backs the zero-down mortgage option for people in active duty, on the national guard, a reserve for government service, and veteran members of all armed forces.
- The Indian Home Loan Guarantee. HUD mortgages are available to people of Native American descent who are earning a low income. This also includes Hawaiians and Native Alaskans.
- The State And Local Programs. If you have problems paying a mortgage down payment or have a bad credit score, then it is recommended that you review the different state and local government programs.
8. The Second Mortgage
If you own a house and have equity built on it, you can opt for the home equity loan (also known as a second mortgage). This is another type of mortgage loan secured by the house’s current equity. A further mortgage option is the home equity line of credit. This alternative is a revolving mortgage loan depends on the property’s equity.
Final Words On The Matter
The type of mortgage chosen is a significant consideration when buying a house. The good news is you have various mortgage options available. In most cases, it is recommended that you focus on the fees and interest rates when comparing loans.