3 Standard Mortgage Types and How They Work

Posted by John Brooks on Monday, April 23rd, 2018 at 8:32am.

For many, their home is the single-most important purchase they have ever made. A lot of time and effort goes into locating the right property. But, when it comes to finding the best mortgage, why do most people take what is being offered rather than research and secure the best mortgage available for their situation?

Considering that you will pay the bank more in interest over the life of the loan than the home is worth, why wouldn’t you invest the same time and effort in finding a mortgage that will reduce the amount of interest you are  paying, potentially saving you tens of thousands of dollars?

There are various types of mortgages available to home buyers.  Each type has their advantages and disadvantages.  Lenders will offer specific mortgage types for you to choose from that favor their bottom line. But when you are armed with the proper information, you can sort through the various available choices to make a deal that is advantageous for you.  

Fixed Rate Mortgage

A Fixed Rate Mortgage is the loan with a fixed rate of interest that stays the same for the entire term of repayment. They usually come in 15 and 30 year repayment lengths.  Mortgages of this type are predictable and allow you to set a fixed budget for repayment.  They are considered stable, but you pay a higher price in interest over the length of the loan.

Adjustable Rate Mortgage

Adjustable Rate Mortgage (ARMs) involve an interest rate that adjusts according to the changes in the rate paid on bank certificates. Unlike a fixed rate mortgage, variable rate mortgage payments are typically fixed for a certain time frame and then adjust to the current rate after the initial time frame is over.  This type of loan carries a lower interest rate initially vs a fixed rate loan, however, because the rate adjusts over time, it can eventually adjust to a higher rate, thus causing you to pay more interest over the life of the loan over a fixed rate loan.   

 

Balloon Mortgage

With a Balloon loan, the borrower has to pays a fixed rate, similar to that of a fixed rate mortgage for a specific time frame.  The rate is usually comparable to that of a fixed loan.  However, once the initial term time period is up, usually 5 to 7 years, the remainder of the balance of the mortgage is due in full.  This can be a risky proposition.  In most cases, homeowners refinance their loans, but unless you are hiding a crystal ball in the attic, you don’t know what loan rates will look like 5 to 7 years from now and you may end up with a higher rate than when you started.

Each mortgage has their pros and cons.  As a home buyer, you need to decide which mortgage fits your budget, your lifestyle, and the level of risk you are willing to assume.  But now that you are armed with the proper information, you are able to secure a mortgage that is right for you.

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