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How To Make Sense Of The Top 6 Most Popular Mortgage Home Loan Programs

07/09/2010
When you're shopping for a mortgage, you need to know your options. Many different mortgage products are out there, and choosing the best involves understanding how they differ. Here's a summary of common mortgage types.

A Fixed Rate Mortgage has an interest rate that remains unchanged throughout the term of the loan. The most popular fixed rate mortgage terms are 15 years or 30 years. With this conforming type of mortgage, the maximum loan amount cannot exceed 28 percent of the borrower's net income.

FHA Loans are ideal for those purchasing homes for the first time because of their easier qualifying terms and lower down payment requirements. They also appeal to first time homebuyers with tarnished credit histories. The Federal Housing Administration defines these terms and rates and also insures these loans against default. To protect lenders, borrowers must buy mortgage insurance. An upfront mortgage insurance payment plus monthly payments are required.

VA Loans are available to qualifying American veterans and surviving spouses. VA loans have many benefits including zero down and greater borrowing ability. Monthly mortgage payments can be as high as 40% of income. A VA home loan is one of the many benefits offered veterans for their service to the country.

An ARM, or Adjustable Rate Mortgage, is a mortgage that offers a very low fixed interest rate for an initial period of time. After that, the interest rate varies or adjusts according to a previously defined adjustment schedule. The problem with an ARM is that the initial mortgage payments are artificially low. Once the rate begins to adjust, monthly payments increase, and may end up being more than the borrower can afford.

With an Interest Only mortgage, borrowers need only make monthly payments equal to the amount of interest. Initial mortgage payments are incredibly low, but after the interest only period expires, monthly payments soar when amortized over the shorter term. Because they're riskier, these mortgages have higher interest rates. If a property is expected to increase in value very quickly, these mortgages can be a good deal. But generally they're very risky. If the property value decreases, the borrower can end up living a financial nightmare.

Jumbo Loans are just what the name implies; loans for very large dollar amounts. Presently, jumbo loans are greater than $417,000. Again, because these loans are riskier, they usually have a higher rate of interest.

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