Types of Mortgages - Which home loan to get

Types of Mortgages

      Other Mortgage articles:

           - Choosing a Mortgage
           - Types of Mortgages
           - What are Mortgage Points?
           - Refinancing

There are many types of mortgages to choose from and deciding the best one for you and your family can be confusing. We describe some of the options below.

Fixed Mortgage

The easiest to understand mortgage is the fixed mortgage. This is a loan that is over a fixed period time and, more importantly, has a fixed interest rate for the entire time. The monthly payment for the loan will be the same throughout the life of the mortgage (note: PMI, insurance, and taxes may change).

The most common time frames for a fixed mortgage are 30 years and 15 years. Each will have a different rate. Typically, all other things being even, a 15 year fixed mortgage will have a slightly lower interest rate than a 30 year fixed mortgage. A 15 year will have a much higher monthly payment, however, so be sure to plan accordingly.

ARM

ARM stands for Adjustable Rate Mortgage. These types of mortgages can get a bit more complicated. The basic thing to know is that the interest rate can change and, as a result, so can your monthly payment.

Usually the initial rate is lower than a fixed mortgage. This can look very attractive to a buyer. Keep in mind that the rate can, and likely will, go up.

ARM mortgages are often termed with the initial fixed number of years followed by how often the interest rate can be adjusted. For example, a 5/1 ARM mortgage usually means that the initial rate is fixed for 5 years and then can be adjusted each year after.

Now the "adjustable" part of the rate is usually tied to a major index. This means the lender can't just raise the interest rate to whatever they want, so the borrower is somewhat protected. The rate gets adjusted per one of these indexes at each adjustable period.

ARMs should be considered carefully when choosing a mortgage. If you plan to only be in your house for a short time, an ARM may be a good choice. For example, if you are 99% sure that you are going to move in the next 3-4 years, then a 5/1 ARM would give you a good rate and even a little cushion if it takes you a bit longer to move or sell your home. We don't recommend using an ARM mortgage just to get the initial interest rate low enough so you can afford the house. This can lead to financial disaster when the rates increase and you can no longer afford the monthly payment.

Interest-only Mortgages

Interest only loans and mortgages became popular during the housing boom when people were sure that the value of houses would continue rise indefinitely. The idea is that you pay only the interest in each payment. None of your monthly payment goes to pay down the principal of the mortgage. This means that you will not ever pay off your home or mortgage this way and you won't build up equity or value in your home. This can lead to a financial disaster if you have to sell in a down market and can't get out of your home enough to pay off your mortgage. If you had been building equity over time into your home, you would owe less on the mortgage and may be better able to react to a dip in house prices.

Mortgage Software and Calculator Pages:

Other Mortgage articles:

           Choosing a Mortgage
           Types of Mortgages
           What are Mortgage Points?
           Refinancing