Before embarking on the home buying process, knowing more about the different mortgage types available and their advantages and disadvantages can help buyers make an informed choice.
|Image source: gobankingrates.com|
Fixed-rate mortgage loans, as the name implies, have an interest rate that remains unchanged throughout the entire repayment period. Repayment periods for fixed-rate mortgage loans typically come in 10, 15, and 30-year terms. Thirty-year term fixed-rate mortgage loans are the most popular because the monthly mortgage loans are much lower. All fixed-rate mortgage loans are fully amortized, with the money paid to go toward interest costs and to pay off the loan principal. Because the amount they need to pay never changes, many buyers find it easier to budget around their monthly payments. One disadvantage though of fixed-rate mortgage loans is their relatively higher interest rates compared to other loan types.
Adjustable-rate mortgages (ARM) have interest rates that typically start low but are periodically adjusted according to an interest index and the margin agreed upon by the lender and the borrower. As such, mortgage payment can vary. ARMs can be attractive to first-time homebuyers, but it should be noted that the lower initial payments come with the risk of drastic changes in interest rates.
Hybrid ARMs are a popular type of ARM. With hybrid ARMs, there is a period in which the interest rate does not change. Once the fixed-rate period ends, the interest rate is adjusted based on the index and the margin. Fixed-rate periods can be as short as three years and as long as 10 years. A 10/20 hybrid ARM will then have a fixed period of 10 years where the interest doesn't change, followed by a floating period of 20 years, during which the interest rate can fluctuate.
Many real estate experts recommend ARMs to those who plan to sell their homes after the fixed rate period is over, while fixed-rate mortgages are typically advised to those who plan to keep their homes for the duration of the repayment period.
Other popular types of mortgages include government-insured loans such as FHA loans, VA loans for members of the US military and their families, and USDA/ RHS loans for rural borrowers.
|Image source: lendclear.com|
Buying a home is an important life decision. Homebuyers are encouraged to research their mortgage options carefully with the assistance of a trusted mortgage banker.