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Although you may hear about many different types of mortgage loans, they all belong to two families: conventional and government . These loans are available through various mortgage lenders.

Conventional Loans

Fixed-Rate Mortgages
The major advantage of fixed rate mortgages is that you know what your housing costs are for the life of the loan. Some fixed-rate mortgages you will probably hear about are:
30-year fixed-rate mortgage
This is the easiest fixed-rate loan to qualify for. It keeps your monthly mortgage payments low by making your payments over a longer period of time. However, the longer the term of the loan, the more total interest you will pay. This mortgage loan may be ideal if you plan to remain in your home for years and wish to keep your housing expense low. This loan also provides maximum interest deduction for tax purposes.
15-year fixed-rate mortgage
The 15-year mortgage offers a lower interest rate than a 30-year mortgage. This type of shorter-term mortgage will save you a significant amount of interest over the life of the loan. By paying off the mortgage more quickly, you also build up equity in your home soon. However, the monthly payments you make will cost you more than those on a 30-year mortgage.

Adjustable-Rate Mortgages
With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted from time to time to keep it in line with changing market rates. This means that when interest rates go up, your monthly mortgage payments may go up, too. On the other hand, when interest rates go down, your monthly mortgage payments may also go down.

ARMS are attractive because they may initially offer a lower interest rate than fixed-rate mortgages. Since the monthly payments on an ARM start out lower than those of a fixed-rate mortgage, you can qualify for a larger loan. You may want to consider an ARM if you are confident your income will be enough to comfortably handle any increase in payments, if you plan to move in a few years, or if you need a lower initial rate to afford to buy the home that you want.

Before applying for an ARM, find out how high your monthly payments could go – the "worst-case scenario." An ARM has two caps on how large an interest rate increase is permitted.

One cap sets the most that your interest rate can go up during each adjustment period. For example, your ARM may cap the yearly interest rate increases at 2 percent, meaning that the adjusted interest rate can never be more than 2 percent higher than the previous year.

The other cap sets the maximum total amount of all interest adjustments over the life of the loan. For example, your ARM may have a lifetime rate cap of 6 percent, meaning that the highest adjusted interest rate you can ever be required to pay is no more than 6 percent above the original rate.

Finally, one important thing to know when comparing ARMs is that the interest rate changes on an ARM are tied to a financial index. A financial index is a published number or percentage. Lenders use this index to measure the difference between what they are making on their investment in the mortgage and what they could be making on other types of investments. The most popular financial index is based on the rate of return on a one-year a Treasury bill (T-bill).

Government Loans
To obtain these loans, you apply through a lender that is approved to handle them.

FHA Loans
With a FHA loan, you can purchase a home with very low down payments (from 3 to 5 percent of the FHA appraisal value or the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given county. They are available in both fixed-rate or adjustable-rate mortgage plans.
Rural Development
Rural development loans offer home loans with no down payment requirements to low- and moderate-income persons who live in rural areas or small towns.
WHEDA’s HOME program features low down payments and below-market interest rates. And with HOME, your rate is fixed for the term of your loan – from 15 to 30 years. You must meet certain requirements in order to be eligible for a HOME loan.


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Published by the Wisconsin Homeowners Alliance, 2018      |     Privacy Policy