If you’re in the market for a house, it’s important to understand what your mortgage options are. We previously wrote about a few types of loans, but we want to add a few more to the mix.
A mortgage can loosely be defined as a loan secured by physical property, which would be your house for this example. All mortgages are the same in this respect, but they differ greatly in how much interest you’ll pay on it and for how long you’ll have to pay it. Some mortgages will offer an interest rate that will never change over time; others might have an interest rate that can increase or decrease, to a certain limit. Interest rates for every type of mortgage will be affected by how much of a down payment you put on your home.
Here are three basic types of mortgages to select from when purchasing or refinancing your home:
Fixed Rate Mortgage: A fixed rate mortgage carries an interest rate that will stay the same forever, no matter how long the length of the mortgage. This means your rate will never go up. However, lenders usually require a higher interest rate from the start to accommodate for this. A fixed rate mortgage might be recommendable for those who are in very good place financially and have a solid credit score.
Adjustable Rate Mortgage: An Adjustable Rate Mortgage or ARM provides a fixed interest rate initially, but can change over time based current market rates. The rate will only change during a certain period of time every several years, referred to as the adjustment period. The initial fixed interest period can be shorter than a year and is usually less than five years. When considering an ARM, also take into account that a cap, a limit to how high the interest rate can increase, can be negotiated with most lenders.
Balloon Mortgages: A balloon mortgage is similar to an ARM in that it has a fixed interest rate for a period of time, the difference being that the entire balance is due at the end of the mortgage. These mortgages usually only last for about seven years and are sometimes seen as a short-term fix for people that cannot get approved for a fixed rate or adjustable rate mortgage. Generally, you wouldn’t apply for a balloon mortgage unless you knew you could pay off the balance. If you cannot pay the entire balance at the end of mortgage, you will be forced to get a new mortgage or face foreclosure on your home.