An Overview of Mortgage Choices

Prospective home buyers have more choices than ever before for home financing. Traditional FHA and VA loans are still available, but lenders offer a wide variety of other options for first-time and returning borrowers.  

Conventional loans

The traditional method of financing a home, these are usually 15-year or 30-year fixed interest loans.  

FHA and VA insured mortgages

These low-cost fixed-rate mortgages are available to certain home buyers on properties that meet stringent federal standards; however, FHA loans can sometimes be designed to include rehab costs for properties in need of repair. The seller generally pays points on FHA-insured mortgages, and always does for VA loans.  VA loans require little or no down payment.  

Adjustable rate mortgages

Adjustable rate mortgages offer fluctuating interest rates based on a financial index; typical indexes used include the Cost of Funds Index and the interest rate on one-year constant-maturity U.S. Treasury securities. While these mortgages usually offer a discounted rate at the start, they often can result in higher interest rates and consequent higher monthly payments, creating difficulties for some borrowers.

Graduated payment mortgages

These newer fixed-rate mortgage arrangements allow buyers to purchase a more expensive home than they might otherwise be able to afford, with payments increasing gradually over the life of the loan. One drawback to these loans is a side effect known as negative amortization; put simply, payments in the early stages of graduated payment loans may not cover the interest due, increasing the overall amount of debt on the home.  This can result in negative equity, a major difficulty if the borrower wishes to sell the home during the first ten years of the mortgage’s life.  

A variation on the graduated payment mortgage is the adjustable graduated payment plan; this works on the same principle, but the interest rate varies according to a financial index. Because payments are gradually increasing, interest rate hikes can produce unpleasant “sticker shock” for unprepared borrowers.

Balloon payment mortgages

Available as fixed-rate or adjustable-rate loans, these mortgages are short-term loans, usually lasting five to ten years. At the end of this term, borrowers are required to either pay off the entire remaining balance, or to refinance at the prevailing rates at that time.  These mortgages are primarily useful for borrowers who expect the interest rate to decline within the next five years and intend to refinance when that occurs.

Assumable mortgages

By assuming an existing mortgage, sometimes with an additional up-front payment, borrowers can often obtain a lower interest rate than the prevailing market will allow. The lender must approve of the arrangement, and the borrower must be creditworthy in order to qualify.  Most FHA and VA mortgages are assumable for qualified buyers.

Austin homebuyers can learn more about these mortgage options and many others from the loan experts at Capital City Funding. Conveniently located within the offices of Capital City RE/MAX, this FHA and VA approved in-house lender provides a wide range of financing options and services for home buyers.  Affinity Properties, in conjunction with Capital City RE/MAX, is proud to offer these lending services to their clients; together with RE/MAX, Affinity Properties is committed to providing the highest levels of customer service and convenience to home buyers and sellers throughout the Austin area.