A Guide to 6 Standard Home Loans

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Now, without further ado, here’s a review of six common kinds of mortgages. Note that some home loans may fall in several of the following categories.

Note that you can reduce your interest rate by paying “points” when you take out your loan. A point is equal to 1% of your loan– so if you have a $200,000 mortgage, paying a point would cost you $2,000– and it will typically lower your rate by 0.25 percentage points.

— 30-year mortgage with a fixed rate of 4% = $955 monthly payment.

Mortgage basics
Though, a review of some mortgage basics is in order. For starters, know that mortgages come in many forms, with a variety of terms. The loan can feature a fixed or adjustable interest rate and can last for any number of years, though most tend to have terms of either 30 years or 15 years.

Which home loan is right for you?
Owning a home is part of the American dream, but the path to living in your own home isn’t easy or simple. The median home value in the U.S. was recently around $200,000, which means a lot of homebuyers should be aiming for a hefty $40,000 down payment (20% of the value of the home).

— 5-1 adjustable-rate mortgage with initial rate of 3.6% = $909 initial monthly payment.

— 15-year mortgage with a fixed rate of 3.3% = $1,410 monthly payment.

The interest rate, along with the duration of the loan, will determine your monthly payments. The example terms below, from the Bankrate.com mortgage calculator, show how significant the differences can be (assuming a $200,000 loan):.

It’s time to shop for a mortgage once you have your down payment ready. That can be confusing, though, as there are many different kinds of mortgages with different terms and features. Here’s an introduction to some standard mortgages that many people get.

1. The 30-year fixed-rate mortgage.
The 30-year fixed-rate mortgage is the most popular type of home loan. It’s been a smart choice for many folks for a long time now, given our low-interest-rate environment, because it locks in the interest rate for the entire life of the loan.

A downside is that 30-year loans tend to sport higher interest rates than shorter-term loans and will probably have you paying much more in interest over the life of the loan. You can offset that by making sure any mortgage you sign up for allows you to make prepayments– i.e., to pay more than you’re required to in any given month. Prepaying is a powerful savings strategy, as it can decrease your loan balance much faster than the original schedule and thus save you a lot in overall interest payments.

2. The 15-year fixed-rate mortgage.
Another strong contender is the 15-year mortgage. It will save you a bundle in interest payments because you’ll get a lower interest rate and you’ll pay down the loan in half the time, vastly reducing your interest charges.

Another strategy is to opt for a 30-year loan and aim to pay it off ahead of schedule by making prepayments– i.e., paying more than you owe every month. You can still save a lot of money in interest by paying the loan off early, but if you ever struggle to pay the increased amount, you can dial it back and only pay your monthly minimum.

3. The adjustable-rate mortgage.
The alternative to the fixed-rate mortgage is the adjustable-rate mortgage (ARM). In mortgage lingo, a 5/1 adjustable-rate mortgage will hold the rate steady for the first five years before starting to adjust it annually– upping it if prevailing rates rise or dropping it if prevailing rates fall.

An ARM makes sense if interest rates are falling and are expected to keep falling, or if you only plan to be in the home for a few years.

A point is equal to 1% of your loan– so if you have a $200,000 mortgage, paying a point would cost you $2,000– and it will typically lower your rate by 0.25 percentage points. You can offset that by making sure any mortgage you sign up for allows you to make prepayments– i.e., to pay more than you’re required to in any given month. The alternative to the fixed-rate mortgage is the adjustable-rate mortgage (ARM). It sports an initial interest rate that’s generally lower than prevailing rates, and it keeps that rate fixed for only a few years, after which the rate is typically adjusted each year in accordance with prevailing rates. In mortgage lingo, a 5/1 adjustable-rate mortgage will hold the rate steady for the first five years before starting to adjust it annually– upping it if prevailing rates rise or dropping it if prevailing rates fall.

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