Little Rock Home Loans ... Which One is the Best for You?

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Fixed Rate Mortgage

Interest is fixed for an amount of time, commonly 30 years but this can vary. At the end of the allotted time, the amortized principal is paid in full and you own your home.

Pros - The security of knowing what your payments will be. You have the option of refinancing if interest rates drop enough. Safe way to go if you plan on keeping your home for at least 15 years.

Cons - If rates do go down you'll be stuck paying higher interest unless you do refinance. You can end up paying more short term than with an Adjustable Rate Mortgage (ARM). 

Update! - With interest rates for Little Rock home loans at their lowest point in years, this type of mortgage may be to your advantage now.

Adjustable Rate Mortgage(ARM)

The interest rate fluctuates with an indexed rate plus a set margin with predetermined adjustment periods. Minimum and maximum caps limit the amount of the adjustments.

Pros - Lower initial rates than fixed. Easier to qualify for a higher loan amount. One year ARMS have outperformed 30 year fixed rate loans for the past 40 years. Good if you don't plan on staying in your house very long, you plan on refinancing, or you're in a market where houses are appreciating quickly.

As Little Rock home loans go, some form of ARM may be the best choice for your home mortgage.

Cons - You're betting that you'll save enough up front to offset any future rate increases.

Warning! - Frequency of adjustments. More often means lower rates up front but more uncertainty. Less often means more security but higher starting rates. Make sure you can afford a payment at the upper cap because counting on refinancing to save you can be risky. What if you can't qualify when the time comes? 

1-Year Treasury ARM

The interest rate is fixed for 1 year, then becomes adjustable every year. The new rate will be figured by adding the treasury average index to the loan margin which is usually around 2.5%. There is usually a 30 year term on these loans. Of all the Little Rock home loans, this is the one my banker brother-in- law uses himself.

Pros - Lower rates than a fixed mortgage at first. If rates go down - you win. Good if rates are trending down and you don't plan on keeping the house very long.

Cons - If rates are trending upward, you can end up paying more than a fixed rate. May not be a good choice if you are in it for the long haul.

Intermediate/Hybrid ARM

These types of Little Rock home loans have a fixed rate for a period of time, then adjustments on a specified schedule. This is shown by the fixed rate length followed by the adjustment period. Ex. - 3/1 means 3 year fixed rate, then adjustments every 1 year afterwards. New rates are figured by some sort of designated economic index plus the loan margin. Usually a 30 year term.

Pros - Same as other ARM type mortgages.

Cons - Same as other ARM's

Flexible Payment Option ARM

You choose from an assortment of payment options each month. There is a "change cap" limiting the amount of change in any given year.

Pros - Can be good if you have a variable income like commissions. Good for freeing cash up if you need it.

Cons - Some payment options won't cover your interest payment which can lead to deferred interest that will increase your balance. Your payments will increase drastically when you are required to pay down the principal. If you can't make them - you lose your house!

Warning! - These tend to be very shaky loans and most experts advise steering clear unless you have a thorough understanding of what you are getting into. These types of Little Rock home loans are sometimes promoted to the unwary so we advise you to avoid them. 

Interest Only ARM

You can pay only the interest for a certain period of time without paying on the principal.

Pros - Good if you don't plan on staying in the home very long. If you are in a hot market with good appreciation rates, you can enjoy lower payments while your home gains value. You don't have to pay on the principal, but if you do, your monthly payments are reduced. You can invest the difference between a fixed rate and interest only home loan to build up your cash reserves.

This has been one of the most popular Little Rock home loans over the past few years if you don't plan on staying in your house very long.

Cons - You will eventually have to pay down the principal. If your homes value has fallen, you may have trouble making the payments. A good rule is that if you can't pay the interest and principal at the same time, you probably can't afford that house.

Convertible ARM

An ARM that can be converted to a fixed rate after a specified time.

Pros - Saves on refinancing costs if you decide to change.

Cons - You'll be locked in to refinancing at a higher fixed rate and won't be able to shop around for a better deal. Most mortgage pros say don't do this. It's easier to just refinance when the time comes. 

Assumable Mortgage

An adjustable rate loan with a balance that can be assumed by another home buyer.

Pros - A seller can offer a low interest loan.

Cons - Savings may not be that great since these are almost never fixed rate loans. Also if the buyer who assumes the loan defaults, the lender will go after the original owner.

Balloon Conforming Mortgage

The interest rate is fixed for a period of time but the principal is not completely amortized. For the remainder of the 30 year term, it adjusts to a new fixed rate based on the Fannie Mae net yield index plus the margin.

Pros - Lower payment initially. If you think you'll be making more money in the future you could save some money at the beginning. Or if you're in a market with rising prices and plan to sell before the balloon comes due.

Cons - You can refinance when the balloon comes due, but you're betting that you can afford the new loan.

Balloon Mortgage

The rate is fixed for a certain amount of time, but the principal is not all amortized during this period. The entire balance of the principal is due at the end of the period in one balloon payment.

Pros - Lower monthly payments with the option of refinancing or selling before the balloon payment is due.

Cons - Refinancing costs may wipe out any savings you have made.

Veterans Administration(VA) Loans

Zero down loan offered to veterans only. The VA guarantees the loan for the mortgage companies. Quite a few of these Little Rock home loans have been made. There are usually several assumable ones available if you shop around.

Pros - No money down and no mortgage insurance required. Loans are assumable.

Cons - Rates may be higher than other conventional loans. Little Rock mortgage companies would receive a 2% service fee from the government so be sure your points reflect a discount compared to similar rate home loans.

Federal Housing Administration(FHA) Loans

Government subsidized loan with low down payment and closing fees included.

Pros - Great for first time home buyers or those who can't afford a large down payment. These loans are assumable.

Cons - You may be able to find better rates with a conventional loan if you can afford at least a 5% down payment. Once again, mortgage lenders get a 2% service fee so make sure points are discounted accordingly.

We hope this information on Little Rock home loans has helped steer you in the right direction for getting the best home mortgage. A good idea is to check with at least 3 different mortgage companies to be sure you're getting the best deal possible.