Loan Details

With a fixed-rate mortgage, the interest rate is set for the term of the loan. An advantage of this type of loan is that it provides predictable housing costs for the life of the loan. Typical fixed-rate mortgages are 30-year fixed, 15-year fixed and 40-year fixed. The shorter the term of the loan, the less interest you will pay over the life of the loan and the faster you will build equity. However, your monthly payments will be higher for shorter-term mortgages, versus longer-term mortgages.

Adjustable-rate mortgages can be an advantageous financing choice under certain conditions, such as rising income expectations and short-term ownership. However, because interest rates and payments can increase either steadily or irregularly, home buyers considering this type of mortgage should be prepared financially for a possible increase in rate and/or payments.

ARMs offer lower "initial rates" by sharing the future risk of higher rates between borrower and lender. The interest rate on this loan will be fixed for a stated period of time and will then become adjustable for the remainder of the loan. For example, a 5-year fixed, 30-year loan would have a fixed interest rate for the first five years and then convert to an adjustable rate for the remaining 25 years.

This adjustment is based on changes in a pre-selected index, and will take place according to a pre-defined schedule (generally every six months or every year). Your interest rate and monthly payment will fluctuate based on changes in your index. The most common indices are the Treasury Bill, Certificate of Deposit (CD), LIBOR and COFI.

Adjustable rate loans have more risk due to the possibility that the interest rate could increase. However, because you are assuming additional risk, the lender will generally reward you with a lower interest rate and monthly payment during the initial fixed interest period. These loans are of particular benefit to borrowers that plan to either sell the property or refinance before reaching the adjustable period.

In contrast to traditional mortgages, where you make the same payments of principal and interest each month during the entire term of the loan, "interest-only" loans offer an initial period during which you pay only the interest payment. After the interest-only period, the loan converts to payments of both principal and interest, which will significantly increase the amount you need to pay.

If you pay only the amount due during the interest-only (IO) period, then at the end of that period:

• You will still owe the original amount you borrowed
• Your monthly payment will increase because you must pay back the principal as well as interest

Fixed-rate interest-only mortgages. With this type of loan, after the interest-only period, the loan converts to payments of both principal and interest. At that time, the amount you need to pay will increase significantly, so it’s important to be financially prepared for the increase. The interest rate is fixed for the life of the loan; however, since the loan begins with an interest-only period, you will pay more interest overall compared with traditional fixed-rate mortgages.

Adjustable-rate interest-only mortgages. This type of loan begins with an interest-only period, after which the loan converts to payments of both principal and interest. At that time, the amount you need to pay will increase. Your payment will increase by even more if interest rates have gone up. Because these increases can be dramatic, it's important that you be financially prepared for them. Since the loan begins with an interest-only period, you will pay more interest overall compared with traditional mortgages.

Building Equity. If you make interest-only payments, your payments are not building home equity. This may make it more difficult to refinance your mortgage or to obtain funds from selling or refinancing your home.

If you have little or no money for a down payment, less-than perfect credit and a few bills, an FHA loan could be what you need to buy a home.

The Federal Housing Administration, a part of the Department of Housing and Urban Development, was created 70 years ago to help first-time buyers, especially low- to moderate-income families and minorities, get the home financing they need.

The amount you can borrow to buy home has been substantially increased. The higher limits also offer homeowners who want to refinance out of expensive ARMs a way to land a competitive rate.

The federal government guarantees repayment, so the lender knows it will not lose money on the deal. That allows the bank or mortgage company to offer competitive rates.

There are 5 major ways you can benefit from an FHA-guaranteed loan:

1. You don't need a big down payment.

An FHA mortgage requires only 3% down. If you don't have the 3%, it can be a gift from a relative, friend or an organization that provides financial assistance in the form of Down Payment Assistance Programs (DAP). DAPs have helped more than a million low- to medium-income individuals and families over the last decade.

The FHA also works with state and local programs that provide help with down payments, closing costs and low-rate loans. None of these options are possible if you apply for a conventional loan.

2. Your credit doesn't have to be perfect.

Your credit score doesn't matter, because the FHA doesn't use it to determine eligibility or your rate. What the FHA cares about is a record of paying your bills, and paying them on time, for at least the previous two years. It will overlook minor lapses on your credit history if there's a reasonable excuse such as losing a job or serious illness.

There are a few things the FHA will not overlook. If you have declared bankruptcy, you must wait at least two years from the date of discharge and have re-established good credit before you can apply. If you have lost a home through foreclosure, you must wait three years and have a clean credit history during that time.

3. You can have more debt.

Your debt-to-income ratio can be considerably higher for an FHA loan than for a conventional loan. And even the FHA limits have been expanded to open home ownership to more people.

4. There are many different types of mortgages from which to choose.

The FHA offers a variety of fixed-rate and adjustable-rate loans.

5. Rates are competitive.

The interest rate will depend on your credit history, with the best rates given to those with the best record of paying their bills and earning a steady income. In general, you can expect an FHA loan will cost only a little more than a conventional loan for which you might qualify.

The big disadvantage to FHA loans is that you must buy costly mortgage insurance if you put less than 20% down on your house. The annual cost is about 0.5% of the loan, usually broken into 12 monthly payments and added to your mortgage statement. You must continue this coverage until you've paid off 22% of the principal. That can include any appreciation in your home's value, not just paying down the debt.

The FHA also charges an upfront insurance premium of anywhere from 1.25% to 2.25% of your mortgage amount, depending on your credit score, and it is due at closing. This charge can be added to your loan amount.

The main purpose of the VA home loan program is to help veterans finance the purchase of homes with favorable loan terms. For VA housing loan purposes, the term "veteran" includes certain members of the Selected Reserve, active duty service personnel and certain categories of spouses.

Here are a few of your benefits when you choose a VA Home Loan:

• No down payment required
• No mortgage insurance
• Easier qualification standards
• Credit and income standards are not as strict
• No prepayment penalties

To see if you qualify under the General Rules for Eligibility, click here.

For a list of Frequently Asked Questions, click here.

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Think of it as a credit card that is secured by the equity in your home. Many homeowners use these credit lines for major items such as debt consolidation, travel expenses and home improvements.

(Also known as a "second")

A home equity loan enables you to borrow money in a lump sum against the equity (the value of your home minus what you owe) you have built up in your home. This loan is subordinate to the existing first mortgage. Home equity loans are often used to pay off credit card debt, buy a car or to make major renovations to a home.