Given the large scale nature of most real estate transactions, financing is required in order for buyers to obtain the funds they need to satisfy the purchase requirements.  Becoming familiar with the different financing options available, you can better prepare yourself when the time comes to make an offer.

Fixed-Rate Interest Loan

In a fixed-rate interest loan, your interest rate will remain the same over the life of the loan.  These loans can be for 15 years, 20 years, or most commonly for 30 years.  This is the most often used loan in today's market and is attractive to buyers because monthly payments will not change over time, allowing buyers to better budget and manage their finances.

Adjustable-Rate Loan

In an Adjustable-rate loan, more commonly known as an ARM, the interest rate changes over time.  There are 3 main components to an ARM; an index, a margin & a cap. An index simply represents the cost of money at that given time, while the margin is a set amount that will be added to the index to determine the interest rate.  Although the interest rates do adjust over time, there is a cap that is set in order to limit the amount it can change.

Interest Only Loan

An interest only loan is well suited for a buyer who believes their income will increase in the coming years.  This is because this option allows a buyer to pay the interest on the loan in the first few years before beginning to pay back the principal as well.

FHA & VA Loans

The Federal Housing Administration (FHA) and the Department of Veterans affairs (VA) offer loans with features that make it easier for first-time home buyers and those who may not qualify for conventional financing.  Some of the major benefits of these loans are that they require less cash upfront for down payment and closing costs, they are available to all income levels, and they provide a wide range of rate, term, and cost options.  However, these loans must meet certain requirements for approval.