There are so many types of loans in the U.S., how do I choose the right one?

Two basic types of loans

In the United States, the seemingly diverse types of loans are actually derived from two basic payments.

1. ARM, or variable rate loans, are available in 3-1, 5-1 and 7-1. It means that the interest rate of the loan is fixed for the first 3, 5 or 7 years of the 30-year total repayment period, while the interest rate after the lock-in period is determined based on the level of market interest rates each year. Usually the loan company will give a range of interest rate restrictions, such as limiting the interest rate to 2.5 to 8%.

2. FRM, or Fixed Rate Mortgage, means that the monthly loan rate will remain stable for a long period of time regardless of changes in market interest rates. The cost of this stability is that the interest rate for the ARM lock-in period is higher than the call rate.

Advantages and disadvantages of the two types of loans

ARM Loan Advantages:

ARMs are suitable for buyers who intend to hold their homes for a short period of time.

The lock-in rate for an ARM is generally lower than the rate for the FAM equivalent, so an ARM loan is more economical if you don't plan to hold for the long term, but rather move out or change homes in a few years.

An ARM may be able to get a higher loan amount and be able to buy a home for a higher price.

If the market interest rate goes down after the lock-in period, the repayment cost is lower and the monthly payment is lower.

ARM Loan Disadvantages:

ARM calculations are complicated and there is a risk of being ripped off by the lending company. If you choose this type of loan, be sure to choose a trustworthy loan broker to help control the interest rate limits and adjustment details.

Another possibility is that after the lock-in period, if market interest rates rise, the monthly payment will suddenly become higher and stay at a high value.

FRM loan advantages:

Interest rates and monthly payments remain stable and do not affect the lender's expenses, regardless of future interest rate fluctuations. Stable repayments can make family financial planning easier.

The calculations are very easy to understand and there are no complications as the ARM enters the later stages of fluctuation.

FRM Loan Disadvantages:

Because the FRM lock-in rate is higher than the ARM lock-in rate, the early monthly payments are more costly for the lender.

If the market rate decreases, the loan contract in hand becomes expensive in comparison. If you want to reduce your monthly payment by resetting your loan, you'll have to pay thousands of dollars and go to the title company for hours to sort out your tax returns, bank documents, etc.

In addition, the FRM terms given by each borrowing company are basically similar, leaving little choice for the lender, while ARMs can generally be customized to fit the situation with many options.

How to choose a loan?

Each buyer's situation is different, and the choices naturally vary. To summarize, a few questions to consider are as follows:

Do you plan to own the house for the long term?

Can you afford a future spike in variable interest rates?

If you need a loan to replace it, is it cost effective to pay the transaction fee?

What is the current overall interest rate environment? Are they going up or down?

How often do ARMs adjust? When will it adjust?

Simply put, for long-term investments, a fixed rate FRM is recommended and an ARM for short-term investments.

If you are concerned that soaring interest rates will exceed the maximum level of variable rates and stay high, a fixed rate FRM is recommended.

If interest rates drop significantly, the loan will need to be reset to get the current lower rate. However, the fees to be paid for the loan replacement need to be taken into account as a cost, which will save more on the monthly payment than the replacement cost. Resetting is recommended, otherwise not recommended.

If the overall interest rate market is historically low and trending up, a fixed rate FRM is recommended; if the overall interest rate is historically high and trending down, a floating rate ARM is recommended.

Pay attention to the frequency of ARM interest rate adjustment. After the initial rate is locked in, the rate is adjusted depending on the bank/lender, either annually or monthly. This is the part where you can consult a loan broker to calculate and choose the right loan option.

In conclusion, getting a loan to buy a home in the US will involve more details. Home buyers are advised to choose a trusted loan broker for detailed planning and design, and ultimately choose the right type of loan for them.