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Learn About 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.
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.
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
- You can rest assured your rates
won't go up, and your
payments will stay the same.
Disadvantages
- They typically have a higher
interest rate. The lenders are
assuming the risk that the market rate may go up,
and you'll be locked in at a lower rate. As a result, these types of
mortgages have a premium for offering the security of the fixed rate.
- They are harder to obtain. Since
your interest rate, and
hence your initial payments, are higher than another type of mortgage,
you won't be able to borrow as much as you could with another type of
loan.
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
- They typically have a lower
interest rate. Since the lender
is assuming less risk on the possibility of interest rates going up,
they offer lower interest rates, which translates to a lower monthly
payment on a similar term fixed rate mortgage.
- The initial rate on an ARM is
fixed. The shorter the
initial fixed period, the lower the initial rate can be.
- You can borrow more with an ARM
than a Fixed Rate Mortgage.
If you're just outside the range of your dream home, an ARM can make
all the difference.
Disadvantages
- Your interest rates may go up. If
the market takes a turn
for the worse, or you keep your mortgage longer than you intended (that
is, you decide to stay in the house longer than the initial fixed
interest rate, instead of selling the house and the mortgage to another
buyer), you may be stuck with larger payments. In other words, if you
initially plan to stay in the house you're buying for five years, and
get a loan with a five year fixed initial interest rate, and you end up
staying longer, your interest rates may rise if the market rates go up.
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
- It is easier to qualify. Since the
loan is effectively a
short term loan (no more than seven years) the lender is taking less
risk, which makes it easier for you to qualify for it.
- It gives you five to seven years of
protection from rate
increases.
- Since it is relatively less risk
for lenders, they are
willing to lend more for balloon mortgages. If you can barely afford
your dream home, this can make all the difference.
Disadvantages
- You must refinance your mortgage,
sell your home, or pay
the remaining amount of the loan after five or seven years. This means
one of three things:
- If you decide to refinance your
mortgage, and the
interest rates have gone up, you'll end up with a higher interest rate.
In this scenario, you may have been better off with a 10-year ARM or a
Fixed-Rate Mortgage.
- If you sell your home, and the
housing market has taken
a turn for the worse, you may not be able to get enough out of the sale
of your home to pay off the remaining amount of your debt.
- You will have to come up with a
large sum of money if
you decide to pay the remaining amount of the loan (after five or seven
years) without refinancing or selling your home. Most people who apply
for balloon mortgages have a difficult time qualifying in the first
place, so it may be difficult to refinance the home when the balance is
due, leaving them in a serious bind.
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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