Types of Detroit Home Loans

Most people in the market for a new home are concerned about getting the best mortgage rate possible, but what many may not realize is that the actual type of home loan you want will affect the interest rate. Generally, the lower the initial rate, the greater the risk to the borrower in the future. That’s not necessarily a bad thing, though, so take a look at the following common types of Detroit home loans and find out if there is one that’s especially attractive to you.

Fixed Rate Mortgages

Generally, the most popular type of home loan, in Detroit as well as the rest of the country, is the fixed rate mortgage. A fixed rate means the interest rate that’s agreed upon when the borrower accepts a loan will remain the same for the entire term. It’s for this reason that fixed rate mortgages are so popular. Buying a home is huge step to take financially, so knowing how much the monthly payment will be–for the entire loan–makes it much easier to plan the expense into a budget over the long-term.

There are a couple of more common fixed rate mortgages, though it’s possible to acquire this type of home loan in a variety of term lengths. They are:

• 15-Year Fixed Rate Mortgage: This type of home loan offers slightly lower interest rates because it has a shorter term length of 15 years. However, this is a great option for anyone with a goal of paying less in interest, since the shorter term length means you make fewer payments.
• 30-Year Fixed Rate Mortgage: The 30-year term on a fixed rate mortgages allows to you double the amount of time you have to pay the principal back, thus, monthly payments are a lot lower. However, it’s important to keep in mind that 30-year fixed interest rates are generally a bit higher and you will pay more in interest over time.

Adjustable Rate Mortgages

These loans have became less popular since the mortgage meltdown several years ago, but with newly tightened lending standards and greater oversight, an adjustable rate mortgage (ARM) is just as good of a loan option as a fixed rate mortgage for the right person.

The way an ARM works is this: The loan starts out with an introductory fixed rate. Usually, this interest rate is quite low as compared to other mortgages, but it only lasts a few years. When the introductory period is over, the interest rate adjusts based on a particular index it follows. If mortgage rates are low at the time of adjustment, the borrower continues to enjoy a favorable rate. If the index/mortgage rates have jumped up over the past few years, however, the ARM rate could potentially skyrocket.

Interest rate caps are put in place on adjustable rate mortgages to ensure the rate does not become astronomical, but there is no way to protect the borrower completely from a loan that becomes unaffordable after the rate resets.

Getting the best mortgage rate means putting in a lot of time researching your options, but one way to narrow things down is to first decide which type of home loan best meets your needs. Of course, this is best done with the help of a Detroit home loan expert. Always consult a professional before committing to a loan of any type.