What Mortgage is Best for You?

If you are considering buying a house, it is important that you understand the different types of mortgage loans that are available so that you can choose the loan that is right for your situation.  There are more types of financing available now than ever before, which is beneficial for the buyer, but which can also make things difficult to figure out.  The two basic categories of mortgage loans are fixed-rate and adjustable-rate loans.

Fixed-rate mortgages keep the same interest rate for the duration of the loan.  Whatever your interest rate is at the time of signing is what your interest rate will be at the end of the loan period, which is typically 10, 15, or 30 years.  These mortgages are beneficial because they are predictable and easy on a homeowner’s budget.  However, they typically come with a higher interest rate than other types of loans.  And although the homeowner can refinance for a better interest rate after a period of time, closing costs and fees will have to be paid in order to do so.

The interest rate (and therefore the monthly payment) can vary during the duration of an adjustable-rate mortgage.  The interest rate varies according to an index that changes with market fluctuations.  The majority of these loans have a yearly and/or lifetime cap, so that the rate cannot go up by more than a certain amount (for example, no more than 4% per year or 6% over the life of the loan).  An adjustable-rate mortgage is riskier than a fixed-rate mortgage because monthly payments can vary significantly from year to year, so the initial interest rate is often much lower than that of a fixed-rate mortgage to counter-balance the risk.


Fixed-rate loans are often better for individuals who plan on remaining in a home for five or more years, while adjustable-rate mortgages, with their low initial interest rates, are often best for those who plan on moving within a few years after purchasing their home.  There are also several hybrids of these two main categories, which combine aspects of each.  For example, a 3/3 adjustable-rate mortgage has a fixed interest rate for the first three years, but starting in the fourth year, the rate changes every three years.

In addition to the standard types of loans mentioned above, there are a few types of government-guaranteed mortgages.  The FHA loan is a fixed-rate loan that is easier to qualify for than a standard fixed-rate mortgage.  In addition, it often allows a smaller down payment and lower interest rates, making it ideal for first-time home buyers without a lot of money saved up.  Another government-guaranteed loan is the USDA Rural Development Guaranteed Housing Loan, which is available to individuals who are interested in buying a home in an area that is considered a Rural Development eligible area.  For more information about this type of loan and to see if an area qualifies, visit the USDA Rural Development webpage.

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