Learn About Mortgages


Fixed-Rate Mortgages

These mortgages, with a fixed percentage rate, and a fixed loan amount are usually carry higher rates than other types of mortgages, but they offer the security and certainty of knowing your monthly payment and interest rate will not change.

Adjustable-Rate Mortgages

These mortgages (also known as ARMs) have a variable interest rate and monthly payments that are recalculated on a regular basis to reflect changes in the market interest rate. These rates are typically lower than the rates in fixed-rate mortgages, but expose you to the risk that market interest rates may rise in the future.

Balloon Mortgages

A Balloon Mortgage has a fixed-interest rate and payment, but the term of the payments is only five to seven years. After this time, the entire balance of the loan becomes due. If you don't have the money to pay back the loan after the initial term, and you can't get another mortgage, you're stuck.
Balloon Mortgages are typically used as a last resort by those who can't qualify for a fixed- or adjustable-rate mortgage. They also are used by those who may have the assets to pay for a home outright, but want to avoid liquidating those assets because they may be providing a higher return on investment than the percentage rate of the loan.

Fixed Rate Mortgages

The basic, tried-and-true, no-surprises mortgage is the Fixed-Rate Mortgage. Your monthly payment is the same, every month of the entire length of the loan.

Advantages

Disadvantages

Common Fixed-Rate Mortgages

The 30-Year Fixed-Rate Mortgage
With 30 years to pay off the loan, these loans allow you to borrow more money for the same monthly payment than shorter loans. They may also make it possible to have a lower down payment, because the down payment will affect your monthly payment less.

The 15-Year Fixed-Rate Mortgage
With 15 years to pay off the loan, these loans may require a higher monthly payment and down payments than their 30-year counterparts, or are suitable for lower-priced homes. If you can make a higher down payment, or can afford a higher monthly payment, or the value of your home puts your monthly payments into your budget range, a 15-year Fixed-Rate Mortgage may be for you. Since the term of the loan is half as long, you can make significant savings on the total amount of interest paid on the loan.

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Adjustable Rate Mortgages

ARMs allow you to fix the interest rate for the length of time that you plan to hold the loan without paying extra for interest rate protection you don't need.

Advantages

Disadvantages

Common ARMs

10/1 ARM
The 10 in 10/1 indicates the length of the fixed initial rate out of 30 years, and the 1 indicates that the interest rate is readjusted annually for the remaining length of the term (in this case, 20 years).

7/1 ARM
The initial interest rate is locked for 7 years, and then annually adjusted for the remaining 23 years.

5/1 ARM
The initial interest rate is locked for 5 years, and then annually adjusted for the remaining 25 years.

3/1 ARM
The initial interest rate is locked for 3 years, and then annually adjusted for the remaining 27 years.

1 Year ARM
A 30-year loan with an interest rate and monthly payments that adjust annually.

6 Month ARM
A 30-year loan with an interest rate and monthly payments that adjust every six months.

The shorter the initial rate is, the lower your initial monthly payment will be, but the higher your highest possible monthly payment will be as well.

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Balloon Mortgages

Similar to a 30-year fixed rate mortgage, balloon mortgages have a fixed rate and payment. However, after the five- or seven-year term, you have to repay the entire loan balance.

Advantages

Disadvantages

Common Balloon Mortgages

5-Year Balloon
A loan with a fixed interest rate and monthly payment for five years. After that, the balance of the loan becomes due in one "balloon" payment.

7-Year Balloon
A loan with a fixed interest rate and monthly payment for seven years. After that, the balance of the loan becomes due in one "balloon" payment.

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