The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). ARMs are 30-year loans with interest rates that change depending on how market rates move. You first agree to an introductory period of fixed interest when you sign onto an ARM. Your introductory period is typically 5, 7 or 10 years. If you sign on for a 5/1 ARM loan, for example, you’ll have a fixed interest rate for the first 5 years. During this introductory period, you pay a fixed interest rate that’s usually lower than 30-year fixed rates.3. Adjustable-Rate Mortgages
After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to calculate how rates are changing. Your rate will go up if the index's market rates go up. If they go down, your rate goes down.
ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For instance, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.
Adjustable-rate loans can be a good choice if you plan to buy a starter home before moving to your forever home. You can easily take advantage and save money if you don't plan to live in your home throughout the loan’s full term.
These can also be especially beneficial if you plan on paying extra toward your loan early on. ARMs can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.
Pros Of Adjustable-Rate Mortgages
- Low interest rates: They offer lower interest rates for the initial introductory period.
- Low monthly payments: The initial low monthly payments allow for a more flexible budget and the opportunity to build up savings.
Cons Of Adjustable-Rate Mortgages
- Payments can increase: If the rate increases, it can dramatically increase your monthly payments once your introductory period is over.
- Fluctuating rates: It’s more difficult to predict your financial standing if interest rates and mortgage payments fluctuate.
4. Government-Backed Loans
Government-backed loans are insured by government agencies, such as the FHA, Veterans Affairs (VA) or Department of Agriculture (USDA). When lenders talk about government-backed loans, they’re referring to three types of loans: FHA, VA and USDA loans. Government-backed loans may offer more options for qualification.
Each government-backed loan has specific criteria you need to meet in order to qualify along with unique benefits, but you may be able to save on interest or down payment requirements, depending on your eligibility.
FHA Loans
FHA loans are insured by the Federal Housing Administration. An FHA loan can allow you to buy a home with a credit score as low as 580 and a down payment of 3.5%. With an FHA loan, you may be able to buy a home with a credit score as low as 500 if you pay at least 10% down. Rocket Mortgage® requires a minimum credit score of 580.
USDA Loans
USDA loans are insured by the United States Department of Agriculture. USDA loans have lower mortgage insurance requirements than FHA loans and can allow you to buy a home with no money down. You must meet income requirements and buy a home in an eligible rural area in order to qualify for a USDA loan. Rocket Mortgage doesn’t currently offer USDA loans.
VA Loans
VA loans are insured by the Department of Veterans Affairs. A VA loan can allow you to buy a home with $0 down and lower interest rates than most other types of loans. You must meet service requirements in the armed forces or National Guard to qualify for a VA loan.
Pros Of Government-Backed Loans
- Lower closing costs: It’s possible to save on interest and down payments, which could mean reduced closing costs.
- Wider qualifications: These loans may offer wider qualification opportunities for borrowers.
Cons Of Government-Backed Loans:
- Must meet certain criteria: You must meet specific criteria to qualify for various government-backed loans.
- Higher costs: Many types of government-backed loans have insurance premiums (also called funding fees) that are required upfront, which can result in higher borrowing costs.
5. Jumbo Loans
A jumbo loan is one that’s worth more than conforming loan standards in your area. You usually need a jumbo loan if you want to buy a high-value property. For example, you can get up to $2.5 million in a jumbo loan if you choose Rocket Mortgage. The conforming loan limit in most parts of the country is $766,550.
Jumbo loan interest rates are usually similar to conforming interest rates, but they’re more difficult to qualify for than other types of loans. You’ll need to have a higher credit score and a lower DTI to qualify for a jumbo loan.
Pros Of Jumbo Loans
- Consistent rates: Their interest rates are similar to conforming loan interest rates.
- Ability to buy pricier homes: You can borrow more for a more expensive home.
Cons Of Jumbo Loans
- Strict qualifications: Qualification for a jumbo loan typically requires a credit score of 700 or higher, more money for a down payment and/or cash reserves and a lower DTI ratio than other loan options.
- Larger down payment: You’ll need a large down payment, typically between 10% – 20%.
