Types Of Mortgages
With a wide variety of mortgages available, how do you know which is the best one for you? Well, the truth is, that everyone’s situation is different, so you should consult your lender before deciding which is the best mortgage for you. However, here is a brief overview of the different variety of mortgages that are available:
Fixed Rate Mortgage: With a fixed-rate mortgage, the interest rate will be established, and remain the same throughout the duration of the loan. Since the interest rate does not change, the monthly principal and interest payment will be the same over 15 or 30 years. To a borrower the advantage is that the rate will remain constant and the monthly payment will remain the same. Thus, it reduces the risk that the borrower may be called upon to make the higher interest payments than they counted on. The tradeoff is that the lender is taking the risk that interest rates will rise and it will get stuck carrying a loan at below market interest rates. Since the lender is assuming the risk, they usually demand a higher interest rate on a fixed loan, which means higher monthly payments than the initial rate and payments on adjustable or balloon mortgages.
Adjustable Rate Mortgages: An adjustable rate mortgage offers a fixed initial interest rate and a fixed initial monthly payment. However, both are fixed for a short period of time – not for the entire life of the loan. With an adjustable rate mortgage, after the initial fixed period, both the interest rate and the monthly payments adjust on a regular basis to reflect the current market interest rates. Each lender may also use different adjustment periods. Also, some adjustable rate mortgages limit the amount that the rates can increase or decrease on any adjustment. An adjustable rate mortgage usually carries a lower initial interest rate and lower initial monthly payment for the buyer in exchange for the buyer taking the risk that rates may rise. Since the buyer is assuming the risk, they may receive a lower monthly payment and initial rate.
Balloon Mortgages: A balloon mortgage has a fixed interest rate and fixed monthly payment, but after a fixed period of time, the entire balance of the loan becomes due at once. As a practical matter, the homeowner is unlikely to have enough cash to pay off the entire loan balance after 5 years, so they will have to go out and arrange a new mortgage. This is a special type of conventional, fixed rate mortgage with a much shorter term. In a balloon mortgage, the terms and payments are usually the same as their conventional loan counterpart, and the interest rates are typically lower. However, the balance is due in full on the loan at the end of a specified, much shorter term.
Speak with your lender to discover the type of mortgage that will best fit your individual needs. As a real estate professional, I am experienced in helping people find reliable lenders. Contact me to find a reliable and experienced lender.
Fixed Rate Mortgage: With a fixed-rate mortgage, the interest rate will be established, and remain the same throughout the duration of the loan. Since the interest rate does not change, the monthly principal and interest payment will be the same over 15 or 30 years. To a borrower the advantage is that the rate will remain constant and the monthly payment will remain the same. Thus, it reduces the risk that the borrower may be called upon to make the higher interest payments than they counted on. The tradeoff is that the lender is taking the risk that interest rates will rise and it will get stuck carrying a loan at below market interest rates. Since the lender is assuming the risk, they usually demand a higher interest rate on a fixed loan, which means higher monthly payments than the initial rate and payments on adjustable or balloon mortgages.
Adjustable Rate Mortgages: An adjustable rate mortgage offers a fixed initial interest rate and a fixed initial monthly payment. However, both are fixed for a short period of time – not for the entire life of the loan. With an adjustable rate mortgage, after the initial fixed period, both the interest rate and the monthly payments adjust on a regular basis to reflect the current market interest rates. Each lender may also use different adjustment periods. Also, some adjustable rate mortgages limit the amount that the rates can increase or decrease on any adjustment. An adjustable rate mortgage usually carries a lower initial interest rate and lower initial monthly payment for the buyer in exchange for the buyer taking the risk that rates may rise. Since the buyer is assuming the risk, they may receive a lower monthly payment and initial rate.
Balloon Mortgages: A balloon mortgage has a fixed interest rate and fixed monthly payment, but after a fixed period of time, the entire balance of the loan becomes due at once. As a practical matter, the homeowner is unlikely to have enough cash to pay off the entire loan balance after 5 years, so they will have to go out and arrange a new mortgage. This is a special type of conventional, fixed rate mortgage with a much shorter term. In a balloon mortgage, the terms and payments are usually the same as their conventional loan counterpart, and the interest rates are typically lower. However, the balance is due in full on the loan at the end of a specified, much shorter term.
Speak with your lender to discover the type of mortgage that will best fit your individual needs. As a real estate professional, I am experienced in helping people find reliable lenders. Contact me to find a reliable and experienced lender.
