Types of Home Mortgages

/Home/5. Types of Home Mortgages

Types of Home Mortgages
15 Nov
Posted by Alex

Buying your first home can be an exhilarating experience. It can also be confusing and frustrating if you don’t understand everything about the different types of home mortgages and how they benefit you. Of course everyone talks about interest rates being fixed and variable, but what other types of mortgage loans are there? And what is the difference between a fixed rate and variable rate? More importantly, what are the best types of home mortgages?

If you’re shopping around for a mortgage already, you’re probably already familiar with terms like ARM (adjustable rate mortgage), fixed rate mortgage and balloon mortgages. If you’re getting ready to purchase a house then you’ll want to be familiar with those terms. The problem comes when trying to understand what the terms mean and which is appropriate for your financial situation.

Many couples have an idea of what they can afford per month. There is usually a specific allotment of funds that couples can afford and mortgages need to meet that allotment. Before making any home purchase, know your budget allotment and often you can shop for a mortgage rate that applies to your budget instead of the house.

Understanding how each different type of mortgage works is essential in the purchase of a home mortgage. The best types of home mortgages aren’t any general type; they’re specific to the needs of the consumer. Be prepared to do a lot of configuring before your purchase.

ARM is an adjustable rate mortgage, or more commonly called “variable rate mortgage. It means your interest rate varies during the lifetime of the loan. The variation is dependent on the prime interest rate which is decided by the economy and housing markets. The benefit of this type of home mortgage loan is that it has an extremely low interest rate. In fact, it is usually the lowest interest rate possible. The disadvantage is that interest rate can rise during the life of the loan and, thus, the monthly payments go up as well. When considering an ARM, be sure to calculate the possible interest rates and monthly payments.

The balloon payment loan is the next type of variable interest rate mortgage, but it also can be fixed. A balloon mortgage has a period of time where payments are made. The “balloon” part of the mortgage is because the entirety of the loan needs to be paid or refinanced at the end of the term. These types of loans can be variable rate as well which means that the balloon can be bigger or smaller depending on the interest rate fluctuations during the period of the loan.

A fixed rate mortgage is based on a payment schedule with an interest rate which is the same throughout the life of the loan. The interest rates are typically much higher (2-5% higher) than a variable interest rate loan. The benefit of this type of loan is that the owners always have the exact same monthly payment and can lock in a lower interest rate in case of future prime rate rises.

The life of a loan is anywhere from 20-40 years. It’s crucial for anyone shopping for a mortgage to be aware of all the options available.