If you are considering buying a home in St. Louis, then you may be more than a little confused by all of the terms you hear about home loans. After all, lenders throw around words like fixed rate, balloon mortgages and adjustable rate mortgages without a thought. But if you aren’t at least familiar with the basics—those terms can be pretty confusing!
Here’s a basic guide to the most common types of home loans.
You’re probably familiar with a fixed-rate mortgage. Your parents more than likely had one, as did their parents before them. The major advantage of fixed rate mortgages is that they present predictable costs for the life of the loan. Some fixed rate mortgages you’ll probably hear about are:
- 30-year fixed-rate mortgages
- 15-year fixed-rate mortgages
They don’t offer the low starting interest rates of adjustable loans, but they are predictable. You always know what your monthly payments will be. They are a good choice for you if you plan to remain in your home for a long time.
More complicated than fixed-rate products, adjustable rate mortgage loans have interest rates that are variable, fluctuating based on an agreed-upon index. Some examples of popular indices are:
- Prime Rate
- Cost of Funds Index (COFI)
- Cost of Savings Index (COSI)
- Constant Maturity Treasury (CMT)
Adjustable-rate mortgages typically start with low interest rates that last several years. This can be an advantage if you know that your income will rise or you plan to sell before the low-cost period ends. When the loan adjusts, your interest rate typically will increase. If you are not prepared, the higher payments may throw you into default.
Interest Only Mortgages
Interest only mortgages are loans that allow you to pay only the interest on the loan for a predetermined period of time— typically five to 10 years. The principle of the loan is not paid down during this period at all, leaving you with a lower monthly payment to meet over the short term. However, once this initial interest only period expires the payments increase to include repayment of the principle and are steeper than a standard loan, as the principle must be paid over a shorter time period. The longer the interest only period, the higher the payments will rise after its expiration.
The government offers a variety of loans to make homeownership more affordable. Loans are guaranteed by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans have lower down payment requirements (3.5 percent) and are easier to qualify than conventional loans.
U.S. Department of Veterans Affairs (VA) is known for helping veterans finance with zero down payments. The interest rates typically are below those of conventional loans. Another benefit is that private mortgage insurance (PMI) is not required. In addition, it is easier to qualify for a VA loan than a conventional loan. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan.
A USDA loan is a government insured loan that is only offered to you if you are a low-income buyer living in a rural area. The USDA Rural Housing Service (RHS) offers low interest rates with no down payment because it allows you to borrow up to 100 percent of the appraised value of the home.
The type of loan you choose should match your financial needs. You should review the different types of mortgage loans and calculate what you can afford and what your tolerance for risk is before you make a decision. It is also helpful to discuss your possible choices with a certified real estate agent.