While it’s normal to hear homeowners speak about their mortgages, we often don’t think about the varying types available. Therefore, when approaching a lender to start the loan application process, it’s important for buyers to not only understand what’s out there, but to have an idea of the pros and cons for each option.
1.) Fixed Rate Mortgages: This mortgage has an interest rate which will remain the same throughout the entire life of the loan, making it one of the most popular choices for approximately 75% of buyers. As far as length, most usually come in standard 10, 15, or 30-year terms, giving homeowners the advantage of knowing exactly what their interest and principle payments will be for the duration of the loan.
2.) One-Year Adjustable Rate Mortgages: These mortgages have a fixed period at the beginning of the loan where the interest will remain the same; however, after the initial phase, the rate will change based on a specific schedule. While beneficial because it may allow buyers to qualify for a loan amount which is higher than they would normally be able to obtain, it’s considered riskier than a fixed rate mortgage because the payments may change significantly.
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3.) 10/1 Adjustable Rate Mortgages: This 30-year mortgage has a fixed interest rate for the first ten years of the loan, but once this period is up, the rate adjusts each remaining year. While this option may not be the best for those planning on owning their home for over 10 years, it still allows buyers the chance to experience the stability of a 30-year mortgage at a lower cost than a fixed rate mortgage.
4.) 2-Step Mortgages: Just like it sounds, a 2-step mortgage has one interest rate for a portion of the mortgage and a different rate for the rest. With this, the interest rate changes with the current market, but the borrower may still have the option of deciding between a variable and a fixed interest rate at the halfway adjustment point. The risk in this option stems from the possibility that the interest rate may actually increase after the expiration of the fixed interest period.
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5.) 5/5 and 5/1 Adjustable Rate Mortgages: With both of these plans, the interest rate will not change for five years. By the sixth year, the rate will be adjusted either every five years or every year. This option is perfect for homeowners who plan on living in their home for more than five years and have no problem accepting changes later on.
6.) 3/3 and 3/1 Adjustable Rate Mortgages: The monthly payment and interest rates remain the same for three years with this plan, and are changed at the beginning of the fourth year. From there, the interest rate is changed either year or three years.
7.) Balloon Mortgages: These mortgages tend to have shorter terms and generally work much like a fixed-rate plan. Since there is a large balloon payment at the end of the loan, the monthly payments are lower, which makes this a great mortgage for responsible borrowers who intend to sell the home before the due date of the balloon payment. On the other hand, problems may arise if the homeowner finds that they cannot afford the large payment at the loan’s conclusion.
