Choosing Your Mortgage

Government Loans

VA Loans

The Department of Veterans Affairs (VA) guarantees loans offered by approved lenders to help qualified veterans, reservists, and active-duty service members to finance their homes.

VA loans offer these features:

A no down payment option
Flexible income, debt and credit requirements to help borrowers qualify
Down payment and closing costs that may be funded by a gift, grant or secured loan

FHA Loans

The Federal Housing Administration (FHA) insures qualified loans offered by approved lenders to promote home ownership.
FHA loan features include:

Low down payment requirements (typically a minimum of 3.5% down)
Flexible income, debt, and credit requirements to help borrowers qualify
Down payment and closing costs that may be funded by a gift, grant or secured loan
A variety of fixed-rate and adjustable-rate loan options available

Fixed Rate Mortgages

Fixed-rate mortgages give you the security of knowing your monthly principal and interest payment will not change.

Fixed Rate mortgages offer:

Predictable monthly payments. The monthly principal and interest payment is fixed over the life of the loan.
Protection from rising interest rates. No matter how high market interest rates go, your mortgage interest rate remains the same over the life of your loan.

Best for people who:

Prefer regular monthly payments with no surprises
Are on fixed or limited incomes
Plan to stay in their homes a long time
Are buying a home at a time when interest rates are comparatively low

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that is fixed for the first one to 10 years and then adjusts periodically based on financial market conditions. During the initial fixed period, an ARM has a lower interest rate than a comparable fixed-rate mortgage, so you’ll save on your monthly payments during the early years of your loan term. Because it offers lower upfront monthly payments, an ARM can help you:

Buy a more expensive home. Because your maximum loan amount is based on the initial monthly payments, you may be able to borrow more.
Manage your cash flow in a high-rate environment. If you are buying a home at a time when interest rates are comparatively high, an ARM can help you avoid making high monthly payments right away.

Plan for future income growth. An ARM can help you keep your payments low while your income increases during the loan’s initial fixed period.
Potentially improve your credit standing. The lower initial rate can make your payments easier to manage, helping you improve your credit and expand your financing opportunities if you make timely payments on your mortgage loan and other credit obligations.

If you plan to move or refinance before the end of the loan’s initial fixed period, you can take advantage of an ARM’s lower payments without worrying about a future rate increase.

After the initial fixed-rate period, the remainder of the loan term is divided into adjustment periods of one year or six months, depending on the particular ARM product you choose. At the end of each adjustment period, the interest rate may change based on the loan’s:

Index: The interest rate on a publicly traded debt security that is used to calculate the interest rate on an ARM. Popular indexes for ARM loans are the one-year U.S. Treasury security and the London Inter-Bank Offered Rate (LIBOR).

Margin: A fixed percentage (usually two to three percent) that is added to the index at each adjustment period to determine the loan’s new rate.
Rate Cap: Typically the maximum amount your interest rate can increase or decrease at each adjustment period and over the life of the loan. This protects you from severe increases in interest rates.

ARM Options

Hybrid ARMs: ARM loans that have an initial fixed-rate period of more than a year are often termed “hybrid” or “intermediate” ARMs. A 3/1 ARM, for example, offers you the security of a fixed-rate loan through the first three years. Beginning with the fourth year, the rate is subject to annual adjustments through the remaining 26 years of the loan’s term.

Because they offer lower rates than comparable fixed-rate loans, hybrid ARMs can be a good choice if you’re fairly certain that you’ll be moving or refinancing before the initial-rate period expires.