There are many different types of mortgages, and it’s to your benefit to educate yourself about the various types before moving forward in the mortgage process. This article will help you to obtain a ground-level of understanding with regards to the differences.
Fixed-Rate Mortgage
In a fixed-rate mortgage, the interest will remain the same for a period of time (generally between 10 and 30 years). After that period, the principal is fully paid. This appeals to people who want to know exactly what their rates will be, but it only really works for those planning to keep their home for the long run.
- This option is best for people who intend to stay in their home over the long run
1-year Treasury ARM
The rate will stay fixed for 12 months, after which it becomes adjustable. The new rates are calculated by the treasury average index in addition to the loan margin. The rates are lower than a fixed mortgage, but keep your eye on rising rates, which could increase the interest you pay.
- Rates that can vary might mean higher payments over the long run
Interest-Only ARM
For a certain time period, you’ll be paying only interest and not making payments down on the principal. This could enable you to buy something outside your price range if you don’t plan to stay there for an extended time, but eventually the principal will be due anyways.
- When the principal comes due you’ll be out of luck if your income or the home value has decreased
Flexible Payment Option ARM
The borrower can select their payment method, with a “change cap” as to how much payments can vary in a 12 month period. This appeals to borrowers who have varying income amounts but some payment options don’t address the interest.
- This option might seem like a good idea, but if you can’t make the principal payments whey they are due, you will lose the house. It’s a gamble often not worth taking
Convertible ARM
Although this starts with an adjustable rate, it can be converted to a fixed rate after a period of time. Although it can cut down on refinance costs, you’ll be stuck with a higher rate for the fixed portion.
- Refinancing may be a better option than selecting this mortgage
Reverse Mortgage
This loan is for older homeowners who want to borrow against the home equity but stay living in the house. The debt only must be paid when the house changes hands and people 62 or older will enjoy the comfort of staying in their own home as they get older. The downside is that the homeowner is still responsible for property tax and insurance while they are in the house.
- This option allows older homeowners to keep their house and live in it
Veteran’s Administration Loans
This loan requires nothing down and it’s only available to veterans. There is also no mortgage insurance with it, and those interested are advised to shop around to make sure you’re getting the best deal.
- Only veterans are eligible for this loan
Intermediate ARM
The rate in this mortgage is fixed over a certain time period, after which it adjusts on a schedule determined in advance. Often this has rates lower than a fixed mortgage and they become more popular when interest rates are up because it’s easier for potential homeowners to qualify. On the downside, however, as rates go up, the homeowner may have to pay more interest than the interest with a fixed-rate mortgage.
- If you’re thinking about selling the house not too long after you purchase it, this mortgage type might appeal to you.
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