The loan application process is filled with choices. As a borrower you decide how much money you would like to put down and what loan program best suits your needs. The default loan for many borrowers is the 30 year fixed. While this makes sense for many it does not fit every buyer’s needs. The best way to decide which program is best for you is to know all of your options. The lending industry is constantly changing and it is important to stay on top of current rates, programs and guidelines. The loan program you choose directly impacts your monthly payment for many years to come.
Without even thinking about it most borrowers automatically opt for a 30 year loan. This gives you the security of knowing what you are going to pay for the next 360 months. What if you don’t intend on being in the house for that long? Did you know there are loan products specifically designed for you? The adjustable rate mortgage (ARM) got a bad rap at the end of the mortgage crisis. Many buyers who wanted the lowest possible monthly payment went with the two year ARM option. When the rate adjusted after the two years they were left with payments many homeowners couldn’t afford. Since then there have been changes to the way ARM’s operate. Gone are the short term two and three year options. Five and seven year ARM’s are the only ARM options currently available. What makes an ARM so appealing is that you get the benefit of a 30 year loan but at a reduced rate. The repayment schedule is still 360 months but fixed for five or seven years. If you are confident that you won’t be in the house for the full 30 years you can see a great reduction in your monthly payment by using an adjustable loan.
Another 30 year alternative is the 15 year option. The main reason you would take a 15 year loan over a 30 is because you want to pay your home off as quickly as possible. The interest rates are lower but the repayment is 180 months instead of 360. This will accelerate the amount of your payment going to principal every month and increase your equity. The main problem with the 15 year fixed is that the payments are considerably higher than a 30 year. Most borrowers who want to pay their home off quicker will just take a 30 year loan and make an extra payment every year. This way they are not on the hook for the larger payment but can still pay down the mortgage as they please.
Many of the exotic 40 year loans and stated income programs are gone. There are still multiple loan programs available. Part of your loan application process should be spent talking to your lender or mortgage broker about your short and long term goals. The loan program you take should fit these goals. There is nothing wrong with a standard 30 year fixed but it just may be for you. Find the loan program that fits your needs.