What’s so special about Cedar Falls, Iowa? It is a pristine, friendly, typically Midwestern small city. Unemployment is low, thanks to a healthy manufacturing sector, growing high tech industries and the University of North Iowa. The cost of living is low and homes are much more affordable than in most other places. There is the 30-plus miles of walking and biking trails through the city, The James and Meryl Hearst Center for the Arts, a prestigious gallery and studio, museums, galleries, a performing arts center, and the list goes on. It is a special place to live and work and raise a family.
If you are buying a home in Cedar Falls, refinancing your current home, or looking for a home equity loan, you will be getting a mortgage, and you will quickly discover there are a lot of choices in mortgages. They are all variations on fixed and adjustable rate mortgages, and you will want to understand the advantages and disadvantages of each. Here are some characteristics of the more common types of mortgages.
Fixed Rate Mortgage: This is the most common type of mortgage, where the interest rate is the same for the life of the loan. Fixed rate loans are popular when interest rates are low, and they favored by people who plan to stay in their homes for a long time.
Adjustable Rate Mortgage: With an ARM, you usually have a very low interest rate for the first five to ten years, and then the rate adjusts. It increases or decreases in relation to an index of current home interest rates. After the first adjustment, the interest rate adjusts at defined intervals, often annually. It can go up or down, depending on what is going on with the index. An ARM is a good choice if you think that interest rates are going to go down in the future. It is also a good choice if you aren’t going to stay in the home for a long time, or if you plan to refinance before the loan adjusts. If that is your plan, be sure your contract does not contain a prepayment penalty.
Interest Only Mortgage: This adjustable rate mortgage not only has a low introductory interest rate, but it also allows you to pay only the interest during that period. It is a good loan for people who are just starting out and who expect their incomes to increase as they get professional experience. The advantage is that you can buy your future home now, instead of renting or buying a starter home. The disadvantages are that you are going to have a pretty substantial increase in your house payment at the end of the interest-free period and you can make house payments for ten full years without paying anything on the principal. A lot of people plan to refinance these loans during the introductory period.
Option Mortgage: This is another adjustable rate mortgage, but during the introductory period you can choose a different payment option each month. You can make a minimum payment, an interest only payment, or a choice of regular house payments. It is great for people who are starting out and for those who have variable incomes. This loan is riskier than others, though, because of those minimum payments. The minimum payment is less than the interest that has accumulated that month. The unpaid interest is added to your principal, so you can actually owe more on your home loan. Bankers call this negative amortization.
Home equity loans are almost always fixed rate mortgages. Home purchases and refinancing can be financed with either a fixed or an adjustable rate mortgage, while option and interest-only loans are used primarily, but not exclusively, for home purchases.
Your lender can help you find the best loan for your situation. You can start that search now by filling out the form on this page.
