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Choosing the Right New Home Loan

by Meiling Hunter
CMR Columnist

Choosing a new home loan can seem complicated given the myriad of mortgage programs that lenders offer. In actuality, there are only two main types of mortgage programs: adjustable-rate mortgages (ARM) and fixed-rate mortgages (FRM). Each of these types of mortgages contain variations to meet nearly any borrower's income and needs, such as government-backed loans, balloon loans, and various loan lengths.

ARM vs. FRM: Which One Is the Right Home Loan for Me?

Adjustable-rate home mortgages have an introductory or "teaser" period where your mortgage payments and interest rate are low. Once the introductory period is over, your mortgage is subject to adjustments, or resets. These are likely to cause monthly payments to increase, possibly by hundreds of dollars.

Fixed-rate home mortgages differ from ARMs in that your interest rate and monthly payments remain fixed, or unchanged, throughout the life of your loan. An FRM may be your best option if you plan to stay in your home for more than ten years, and you are comfortable with the given interest rate and monthly payment. The most widely chosen FRM is the 30-year variety.

Other New Home Loan Options

Many home loans exist that can cater specifically to your needs. First, use an online mortgage calculator to determine what your family can afford. Next, look for variations in the standard FRMs and ARMs to see if one fits both your budget and your needs. Here are some examples:
  • Government-backed loans. Federal Housing Administration (FHA) and Veterans Affairs (VA) loans are government-insured loans. FHA loans are designed for borrowers who have low or moderately-low incomes. VA loans are restricted to individuals who have served on active duty in the U.S. Armed Forces and were discharged under conditions other than dishonorable.
  • Balloon loans. Balloon loans are short-term (5 or 7 years) loans that are amortized over 30 years. At the end of the short term, the balance of the loan is due in a balloon payment. If you expect to sell or refinance your home by the end of the short term, a balloon loan might be worth considering.
  • Various loan lengths. Not only do overall loan terms vary, but so do reset periods on ARMs. A longer initial rate period can make an ARM worthwhile if you don't plan on staying in your home for more than a few years.
Again, always use an online mortgage calculator to help assess the best course of action for you and your family.

Sources: About the Author
Meiling Hunter has worked in the mortgage industry for four years. She graduated from the University of California, Davis, with a double major in Economics and Philosophy.

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