Home Buying 101: The 3 Basic Types of Mortgage Loans

Since the housing crisis, mortgage lenders have streamlined their loan options. Risky, creative, and exotic loans are a thing of the past and as such, the industry has made a return to traditional, safe, and responsible home financing. These days, borrowers have three basic types of mortgage loans to choose from. Here, our builders in Southport NC breaks down each option so you can have a better idea of what to expect before you meet with your lender.

Fixed-Rate Mortgage Loans

Fixed-rate mortgage loans are among the most common and they also happen to be among the most favored by conventional home buyers. This type of loan features a stable interest rate that doesn't fluctuate over the life of the loan. This means that the buyer will make the same monthly payment month after month until the home is paid off.

With a fixed-rate loan, the interest is largely paid before the principal. For example, with a 30-year fixed-rate loan, very little money is applied toward the principal of the home in the first 15 years. The majority of your payment goes toward paying the interest on the loan. But, once you pass the halfway mark, the tide changes and the majority of your payment will start going toward the principal. Fixed-rate loans are available in 10, 15, 20, and 30-year installations.

Adjustable Rate Mortgage Loans

Whereas a fixed-rate loan features an interest rate that doesn't change, an adjustable rate mortgage loan has an interest rate that can change from year to year. The industry also offers hybrid adjustable rate loans that feature an introductory period in which the rate is fixed. After the introductory period expires, the loan is amortized over the balance of the term with an interest rate that is adjusted annually. In other words, the loan is structured to have a fixed interest rate for a period of anywhere from three to ten years, after which the loan's interest rate is based on the Treasury bill index (and margin) and changed year-to-year as the T-bill value fluctuates.

Interest-Only Mortgage Loans

Interest-only loans are also called "jumbo loans" and they are most commonly obtained by wealthy home buyers with irregular incomes. This type of loan is typically for homes costing upwards of $650,000. A jumbo loan has the buyer paying only the interest on the loan for the first few years of the mortgage, typically five, seven, or ten years. During that time, the interest rate is fixed.

In many ways, a jumbo loan is similar to a hybrid ARM in such that after the introductory interest-only period is over, the loan's rate is then adjusted annually and the borrower's payments start being applied to both the principal and the interest. In most cases, when the loan resets, a borrower can expect their payments to increase, sometimes substantially.

Let Trusst's Builders in Southport NC Work for You

Now that lenders are finally starting to approve loans again, now is a great time to get into a new home because the interest rates are still low. Why not let one of the most trusted luxury home builders Southport NC design and build you the ultimate dream home? Our home builders in Southport NC will work with you and within your budget so you can get the most value for your hard-earned dollar. Visit Trusst Builder Group today or call us at 910-371-0304 to schedule a consultation.