Understanding the Mortgage Process
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Today’s homebuyer has many more financing options than have ever been available before. From traditional fixed-rate mortgages to adjustable rate and hybrid load, from small loans to jumbo loans, there are a multitude of programs.
While these different choices may seem overwhelming at the least, and confusing at best, the overall goal is really quite simple: find a loan that fits both your current financial situation and your future needs. We recommend that you should spend time talking with different lenders before deciding on the right loan for your unique situation.
Most loans fall into three categories: fixed rate, adjustable rate, and hybrid loans that combine features of both.
A fixed rate mortgage has the same interest rate for the life of the loan. Historically, fixed rate mortgages have been the most popular among homeowners, because a fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Fixed-rate mortgages usually carry 30-year or 15-year terms, however, in recent years lenders have been offering 20-year and 40-year loans.
Commonly referred to as an ARM, adjustable rate mortgages differ from fixed-rate mortgages because the interest rate and monthly payments can change over the life of the loan. This is because the interest rate for an ARM is tied to an index, i.e. US Treasury Bill yields that may rise or fall over the term of the loan. To protect a homeowner against large increases in rate, ARM loans generally (but not always) have a cap that limits the amount of increase in rate between adjustment periods. The adjustment period may begin after 1 yr, 3 yrs, 5 yrs, or 7 yrs, hence the terminology 1 yr ARM, 3 yr ARM, etc. They also have a ceiling on how much the rate can increase during the life of the loan. Because of generally lower introductory rates and protection against rate inflation, ARM loans are the most widely used alternative to fixed-rate mortgages.
Hybrid loans combine features of both fixed- rate and adjustable rate mortgages. Thus, a hybrid loan may start off with a fixed rate for a defined length of time and later convert to an adjustable rate mortgage. However, it is important to find out how much the rate may increase after the conversion, as some hybrid loans have no interest rate caps during their initial adjustment period.
Variations on the loan theme
Balloon loans may be beneficial to homeowner who do not plan to say in their house for more than a few years.
Both FHA and VA loans use lower qualifying ratios than conventional loans and in many instances require smaller or no down payments.It is important to remember that FHA and VA loans are not issued by theUS government. These loans are made by private lenders such as banks, savings and loans, and mortgage companies.
These loans are insured by the US government to protect the lender in case the buyer defaults.
Any US citizen may apply for an FHA loan, however, VA loans are only available to veterans, their spouses and certain government employees.
Call Piedmont Preferred Realty, Inc. for your free, no obligation consultation today at (919)225-1498 mailto:Broker@PiedmontPreferred.com