Types of Mortgages
What Are the Different Types of Mortgages?
Choosing the right mortgage is important to ensure your financial stability in the future. Here are the main types of mortgages:
- Fixed rate mortgages: Under a fixed rate mortgage, when you take out a loan from a financial institution to pay for your house, the interest rate that you pay on the loan and the monthly payment will be determined before you accept the loan. These values will remain the same for as long as you agreed to pay off the loan.
- Adjustable rate mortgages: With an adjustable rate mortgage, the interest rate and monthly payment of your home loan will remain the same only for an initial period of time, ranging from six months to five years. After that time the interest rate and payments can be periodically adjusted, based on current market interest rates.
- Balloon mortgages: A balloon mortgage starts off with an interest rate and monthly payment that is fixed for the duration of the loan, but after a short amount of time set by the lender, the entire loan must be paid back.
- Interest-only mortgages: A bit of a misnomer, an interest-only mortgage is an interest-only payment method which can be combined with any type of traditional mortgage. Depending on the terms of the mortgage, during an initial period the borrower only pays for the interest portion of the loan, thereby reducing the payment. After that time, the payment amount will increase to include both the interest and the principal, often at an amount higher than payments would have been in more traditional payment methods.
What Are the Pros and Cons of Each Type of Mortgage?
Fixed Rate Mortages
The advantage of a fixed rate mortgage is that it gives the home owner stability. The owner will know exactly how much interest and payment he owes each month, which allows him to plan out his financial situation for the duration of the loan. The downside is that the interest rate and monthly payments are usually higher than for other types of mortgages.
Adjustable Rate Mortgage
An owner who takes out an adjustable rate mortgage will initially have a lower interest rate and monthly payment than on a fixed rate mortgage. However, the owner takes the risk that the interest and payments will later increase as the market changes. However, many lenders will agree not to charge above a certain interest rate "cap" even if the market value goes above that rate.
A balloon mortgage has the advantage of being paid off much faster than a fixed rate or adjustable rate mortgage; usually within five years. However, this only benefits people who are able to come up with the money to pay off the entire loan within such a short amount of time. Most people will not able to pay off the loan within the set amount of time and will have to take out another loan.
An interest-only mortgage has become much more popular in recent years and can provide several benefits. The reduced initial payment amount can help borrowers qualify for larger mortgages than under traditional payment plans. Borrowers can also save money from the reduced payment to make other investments. For homebuyers in a rising market who are not planning to stay in a property for very long, interest-only mortgage can further leverage a real estate investment.
However, it is critical that borrowers using interest-only mortgages recognize and prepare for the jump in payments that will become due after the initial period. Often borrowers are unable to afford the higher amounts and run the risk of foreclosure. And of course, there's never a guarantee that a rising market will continue for as long as you think it will.
Do I Need a Real Estate Attorney?
Buying a house is a complex and daunting task, but if done wisely, can save you a lot of money over the duration of your mortgage. A real estate attorney familiar with the market in your area can be a helpful guide through the process.
Consult a Lawyer - Present Your Case Now!
Last Modified: 03-12-2014 11:48 AM PDT
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