FHA and VA Loan
Fixed Rate Mortgages
Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner.
This may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you'll be stuck with that high interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you'll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.
The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:
Pay off the loan in half the time of a 30-year loan.
Equity builds up more quickly than in a 30-year loan.
Payments are higher
Pay off the loan in 2/3 the time of a 30-year loan.
The overall interest paid is considerably less than for a 30-year loan.
The most common choice of financing, especially for first-time home-buyers, as it's the easiest of the fixed-rate loans to qualify for. Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of "padding" between the amount you can afford to spend and the monthly payment for your desired property. The 30 year Fixed-Rate program is more desirable if you plan on staying in the same home for several years, since equity builds more slowly than for shorter-term loans.
Adjustable-Rate Mortgages (ARMs)
Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFI, or LIBOR [London Interbank Offered Rate]) and your payment will be based on the index your lender uses plus a margin, generally of two to three points. Get the formula used by your lender in writing and make sure you understand what it means.
Fortunately, the amount an ARM can increase is limited. There are "caps" on how much your lender can increase your rate, both for a period of one year and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you'll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.
Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.
VA Loans: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase "FHA approved" when looking at ads for homes.