Mortgages allow borrowers to buy homes without paying for the entire property upfront. Instead, they typically include a fixed or variable interest rate and require a down payment from the borrower.
Several types of mortgage loans cater to different homebuyer profiles. These include conventional mortgages, government-backed mortgages, and nonconforming mortgages.
A fixed-rate mortgage has a fixed interest rate and payment schedule for the entire loan term. It is the most popular type of home mortgage and the best option for borrowers who want predictability. Fixed-rate mortgages usually have 30-year terms, but some Tampa mortgage lenders offer 20- and 15-year options. They are also amortized, so some monthly payments go toward the principal, and the rest cover interest.
Borrowers can choose whether to pay extra each month, which will shorten the payback period and build equity faster, or if they prefer to keep monthly payments low and predictable. However, it’s important to remember that a fixed-rate mortgage may have higher long-term interest costs than shorter-term loans. It also requires a longer commitment.
An adjustable-rate mortgage, or ARM, is a loan program in which the interest rate and monthly payments change over time. Most ARMs have a fixed interest rate for the first period, but after that, they adjust annually or at other intervals.
Many ARMs have caps that limit how much your interest rate can increase over the life of the loan, as well as a lifetime cap that prevents your mortgage payment from going above a certain level. Hybrid ARMs have an initial fixed period followed by an adjustable rate and are standard.
There are also government-backed loans, such as FHA and VA mortgages, and nonconforming loans for borrowers who don’t meet the minimum credit, income, or down payment requirements of conforming mortgages.
Many Tampa mortgage lenders offer a variety of mortgage rates and payment options. They also use the size of your down payment and your credit score to determine how much of a loan you can qualify for. In addition, mortgage rates can be fixed or change over the course of your mortgage term. Mortgages with variable interest rates are often called adjustable-rate mortgages, or ARMs. Some ARMs have a fixed period followed by a variable rate for the remainder of your mortgage. In contrast, others have a hybrid interest rate structure with a combination of fixed and variable rates over the life of your loan.
Homebuyers who choose a variable-rate mortgage may benefit from lower monthly payments if interest rates decline during their term. However, if interest rates rise, homeowners with variable-rate mortgages will likely have to increase their prices or refinance their loans.
Interest-only mortgages allow borrowers to make payments consisting only of the interest on their loan for a set period of time. After the introductory period ends, borrowers must begin making both principal and interest payments or choose to refinance.
Because borrowers aren’t putting any dent into the principal of their loan during the interest-only period, they may wind up with enormous monthly payments that they can’t afford once the introductory rate expires. They also risk owing more than their home is worth if property values decline.
Despite these risks, an interest-only mortgage can benefit people who plan to sell their home before the interest-only period ends or those who want to use their annual bonuses to pay the principal. However, Tampa mortgage lenders are generally picky about approving interest-only mortgages, requiring substantial savings and a high income.
A home equity loan is a second mortgage that allows you to borrow against the value of your property. You can qualify for up to 90% of your appraised property’s value minus your current loan and mortgage balances. Lenders will use your debt-to-income (DTI) ratio to determine your qualifications for this type of loan.
A home equity loan can be an excellent option for borrowers who want to consolidate their debt or finance renovations. However, you’ll need to remember that your home may be at risk of foreclosure if you can’t repay the debt. This is why you should consider the alternatives to a home equity loan before making your final decision.