There are several different options available in the world of mortgage loans. Selecting the best option for your home buying needs is an important decision because it is likely to effect your budget for many years.
Listed below is a quick breakdown of several mortgage loan options and what you can expect of them.
Fixed Rate Mortgages
Advantages: predictable monthly payments, easy to budget, available in a variety of term options
Disadvantages: higher interest rates, harder to obtain with poor credit
By and large, fixed rate mortgages are the most popular and account for nearly 75% of all loans. They usually span over 10, 15, or 30 years but can also span 5, 20, 40, or 50 years.
The interest rate of a fixed mortgage stays the same for the entire duration of the loan which allows the benefit of a predictable monthly payment. These mortgages rates are easier to budget because they never change. Also, if interest rates are really high when you take out the loan, you can refinance the loan when the rates go down.
Adjustable or Variable Rate Mortgages
Advantages: lower interest rates with higher loan amounts, provide flexibility
Disadvantages: risky, unpredictable
One Year Adjustable Rate Mortgage (also known as Adjustable Rate Mortgages or ARMs)
The interest rates on an adjustable mortgage change after a fixed period of time. They are much riskier than fixed rate mortgages because the payments can change dramatically. On the flip side, the buyer usually qualifies for a higher loan amount which allows the purchase of a more valuable property.
Hybrid Adjustable Rate Mortgages
Hybrid adjustable mortgages combine the qualities of both a fixed mortgage rate and an adjustable mortgage rate. The initial interest rate is fixed for a set period of time at the beginning of the loan and is followed by an adjustable rate for the remainder.
Types of Hybrid ARMs
10/1 Adjustable Rate Mortgage – fixed for the first 10 years; rate adjusts each year after the fixed rate period
5/5 and 5/1 Adjustable Mortgages – fixed for the first 5 years; rate adjusts every 5 years or every year after the fixed rate period
3/3 and 3/1 Adjustable Mortgages – fixed for the first 3 years; rate adjusts every 3 years or every year after fixed rate period
2-Step Mortgage – fixed for a designated time period and adjusts to a different fixed rate for the remainder of the loan
This mortgage option is for a much shorter term and offers a much lower payment than a fixed rate mortgage.
Features: shorter terms (usually five to seven years); homeowner makes monthly payments at a set interest rate for the duration of the loan term and pays off the rest of the principal, takes on a new mortgage, or sells the home at the end of the fixed period
Advantages: lower interest rates, lower monthly payments, larger loan amounts
Disadvantages: extremely risky, large financial obligation at the end of the loan’s life, must refinance mortgage if unable to pay the principal when the term ends and could face unaffordable terms if interest rates have risen or credit has deteriorated since the loan was issued
Find out more about the different types of loans available by contacting a trusted mortgage advisor.