Types of Financing for Your Mortgage

When financing a home purchase, the kind of mortgage you choose determines your monthly payment and the interest rate you get on your loan. There are four main ways of financing the mortgage for your home: 30-year fixed rate, 15-year fixed rate, adjustable rate, and interest only. Each of these mortgage financing options has its pros and cons, your credit union can help you find the right financing for your situation.

30-year fixed rate. This is a mortgage that is made as a 30-year loan. The rate is fixed, meaning that the interest rate does not go up or down with fluctuations in the market. And because the interest does not fluctuate, the payments remain fixed as well (although you may have to pay more in property taxes as they increase, or as the home appreciates in value). Most buyers choose this long term financing option because the monthly payments are lower than they would be with a short term loan. The main disadvantage is that the interest rate is often a little higher than it would be for a 15-year loan, and this results in more money paid in interest over the life of the loan. Also, the house gains equity at a slower rate. If interest rates drop, the rate of the loan does not change, but it is usually possible to refinance to the lower rate.

15-year fixed rate. Like the 30-year loan, this rate is also fixed. The main difference is that you pay of the loan in 15 years instead of 30 years. This means that your payments are much higher than they would be if you had a long term loan. However, because you pay it off faster, the home gains equity more rapidly and you save a large amount of money in interest. Additionally, most lenders offer lower interest rates if you opt for a 15-year loan. Your tax deduction for interest will be smaller with a 15-year than with a 30-year, however, because you are paying less interest.

Adjustable rate mortgage. Contrary to the fixed rate mortgage, the adjustable rate mortgage changes when the interest rates changes. Most adjustable rate financing does have a fixed rate and payment for a period at the start of the loan. Depending on the length of the total loan period, this can be anywhere from five to 10 years. However, after the initial period, the rate is variable. This means that you may start out with a very low rate at first, but your rate (and your payments) may increase substantially as the market fluctuates. Because of the nature of the loan (low payments at first), the borrower may qualify for a larger loan than he or she would otherwise qualify for if the rates were fixed.

Interest only loan. This is a loan relatively new to the world of mortgage financing. It is basically a type of adjustable rate mortgage, although a very few lenders offer them at fixed rates. Despite its name, an interest only loan is not exactly that. The borrower pays only the interest payments on the loan for the first five to 10 years (seven to nine years is common). This means that the borrower may be able to qualify for a larger loan. Additionally, someone who might not be able to afford a house payment can do so when he or she is only paying the interest. The downside comes when the initial payment period ends. After the first several years, you begin paying on the principal as well, resulting in a balloon payment. This is a loan that comes with a great deal of risk, especially if you are unsure of whether or not you will earn enough down the road to cover the sudden payment increase.

Again, it is a good idea to consult with your credit union to explore the risks of each option in relation to your circumstance. Contact your credit union about rates, terms and benefits for each of these financing options.

For additional information, please contact a local Credit Union

Nicole Soltau is the President and Founder of CreditUnionRate.com.
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