There are lots of ways to finance a home in today's improving economy. There are low-downpayment options and no-downpayment options; loans for primary residences and loans for investors; and, there are even specialized loans available to members of the military.
For all mortgage applicants, though, it will eventually be time to decide whether to use a "fixed-rate" or "adjustable-rate" mortgage. Each has its merits and drawbacks, and with a little bit of knowledge, you'll be in position to decide which loan type is best for you.
Adjustable-rate mortgages often carry lower mortgage rates. Fixed-rate mortgages offer predictability.
A "mortgage" is a loan used to finance a home. In a mortgage transaction, your home is used as collateral while the home is in repayment. Repayment periods typically last between five and thirty years. some mortgages are for lesser number of years, and others are for longer.
The typical U.S. mortgage will range in size from $50,000 to $2 million, however, some banks will issue mortgages for smaller amounts and others will make loans of $4 million or more.
Home buyers use mortgages to fund whatever amount of a home's purchase price they can't -- or won't -- pay with cash.
For example, a home buyer purchasing a $200,000 home may have $10,000 saved to pay toward the home. The remaining $190,000 will be mortgaged, and the buyer will repay its bank the borrowed amount over time, according to the terms of the loan.
The terms of a mortgage loan will vary by loan, accounting for such loan traits as mortgage interest rate, mortgage loan size, and length of the mortgage loan.
Each of these traits are at the borrower's discretion, too. If you want your mortgage rate to be lower, you can ask for it. If you want your loan size to be lower, you can ask for that, too.
You can also choose whether your mortgage interest rate will be fixed for the length of your loan; or whether it can adjust. A loan of the former type is known as a fixed-rate mortgage. A loan of the latter type is known as an adjustable rate mortgage.
Fixed-rate mortgages are far more common than adjustable-rate ones; and the most common fixed-rate mortgage is the 30-year fixed rate mortgage. Since 2011, however, shorter-length loans such as the 15-year fixed-rate mortgage have gained market share.
There are reasons to choose a fixed-rate mortgage over an adjustable-rate mortgage, just as there are reasons to choose an adjustable-rate mortgage over a fixed-rate one. Choosing the loan which is best for you is a matter of preference.
The top reason homeowners choose fixed-rate mortgage is because the fixed-rate mortgage is predictable. Each month, until your loan is repaid, your mortgage payment remains the same.
For some households, the unchanging nature of a fixed-rate mortgage feels "secure". It can be simpler to plan a financial future when you know exactly how much you'll owe month after month after month.
However, this kind of mortgage rate stability comes at a cost.
With an adjustable-rate mortgage, over time, a bank can change your interest rate to better match market conditions. This is a "sharing of risk" between bank and borrower. In exchange for sharing such risk, adjustable-rate mortgage borrowers get access to lower mortgage rates.
30-year fixed mortgage rates and 15-year fixed rate mortgage rates get "pumped up" by lenders because, in a fixed-rate transaction, the bank bears all of the risk.
Fixed-rate mortgages operate as exactly as they're named. For the length of the loan, the mortgage rate of the loan remains "fixed". As a result, the payment on the mortgage remains fixed, too.
The term, or length, of a fixed-rate mortgage is at the borrower's sole discretion.
Typically, mortgage lenders make fixed-rate mortgages available with loan terms of 10 years, 15 years, 20 years, and 30 years. Other lengths are available, too, but they're uncommon and are often accompanied by high mortgage rates, which is why so few borrowers ever use them.
The 30-year fixed rate mortgage is the most common fixed-rate mortgage, likely because repayments on a 30-year fixed rate mortgage are lowest when compared to other fixed-rate mortgages.
Current 30-year mortgage payments are lowest because the amount borrowed from the bank is repaid over the longest period of time. By contrast, mortgage payment associated with a 15-year fixed rate mortgage are higher because repayments are compressed over a shorter period of time.
The formula by which mortgage payments are calculated is called amortization (ah-mohr-tih-ZAY-shun). Amortization favors banks because it results in mortgage payments being front-loaded with interest in the early years of a loan; and back-loaded with principal in the later years of a loan.
Consider today's current 30-year mortgage rate near 4.25 percent. Its first mortgage payment is loaded with 72 percent interest. In comparison, a 15-year fixed rate mortgage's first payment is just 47 percent interest.
Not until a 30-year fixed rate mortgage reaches its 165th payment does the principal repayment begin to outweigh mortgage interest paid.
30-year fixed rate mortgage payments are least expensive of the common fixed-rate loan terms. However, it may not be your best long-term deal.
Homeowners using 30-year fixed rate financing pay 65% more interest over the life of a loan as compared to homeowners using a 15-fixed rate mortgage.
The 30-year mortgage rates are available for nearly all of today's popular loan programs. And, with nearly no exception, 15-year mortgage rates are available, too.
However, not all loan programs offer 10-year mortgage rates or 20-year mortgage rates to prospective borrowers. Before applying for a loan with your lender, then, be aware of which loan programs offer which fixed rate mortgage terms.
Conventional loans, which are loans backed by Fannie Mae and Freddie Mac, offer a full suite of fixed rate mortgage rates. 30-year fixed mortgage rates are the most common request, followed by 15-year fixed rate mortgage rates. 10-year mortgage rates and 20-year mortgage rates are also available.
The FHA loan program offers a more limited series of fixed rate mortgages.
FHA loans are commonly used by home buyers in search of a low-downpayment mortgage -- the FHA's minimum downpayment requirement is just 3.5 percent. Via the FHA, borrowers can use 30-year fixed mortgage rates and 15-year fixed rate mortgage rates. 10-year and 20-year loans are not available.
The VA loan program also offer a limited set of fixed-rate home loans. Available to veterans and members of the military, VA loans can be used with accompanying 30-year mortgage rates or 15-year mortgage rates. There are no 10-year mortgage rates or 20-year mortgage rates available for VA borrowers.
Lastly, home buyers opting for the USDA 100% home loan program are limited to 30-year loans.
The USDA will not make 15-year mortgage rates available to its borrowers until September 2014. The good news, though, is that USDA 30-year mortgage rates are often the lowest of all available loan types, which means that the USDA 15-year mortgage may be similarly low.
For home buyers in search of a fixed rate mortgage, current 30-year mortgage rates are well-below historical norms. 15-year mortgage rates are similarly low. It's an excellent time to consider a fixed rate home loans.
Compare today's current mortgage rates. Rates are available online at no cost and with no social security number required to get started.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Lorraine L. Medical Compliance
Thank you for The Mortgage Reports. I find your reports to be both helpful and informative.
Ron Z. Real Estate Agent
I am a full-time Realtor and I look forward to daily updates from The Mortgage Reports. The advice is useful and the insight is important. Thank you!
Sarah M. Office Manager
The Mortgage Reports has been an invaluable resource to me -- it helped me to pick the sweet spot to refinance. Thanks!
2016 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)