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Which Type of Home Mortgage Is Right for You?
A wide range of home mortgages is available to buyers. Even for first time buyers, it is possible to find a mortgage tailored to your needs. However, to pick the right type of home mortgage for you, you need to know what your loan options are. This brief guide will explain the most common types on the market today.
The interest rate on an adjustable rate mortgage (ARM) lowers and rises in tandem with fluctuations in the state of the economy. When the prime interest rate goes up or down, your home mortgage's interest rate goes up or down too. This lets you get the maximum benefit from periods of low interest, but also means that if the prime interest rate rises sharply, your interest rate and monthly payments will rise with it. Because the risk of rising or falling prime interest rates rests on you, not on the bank, banks offer lower introductory interest rates on adjustable rate mortgage loans than on fixed rate mortgages.
The interest rate on a fixed rate home mortgage does not change over the term of the loan; it is set, or fixed. This protects you from the risk that interest rates will rise, but it also keeps you from getting any benefit if interest rates fall. Banks assume that at least once, the prime interest rate will spike above the interest rate of your fixed rate mortgage and the bank will have to pay the difference itself. Because banks must budget for this eventuality, they offer higher interest rates on fixed rate mortgage loans than on adjustable rate mortgages.
A convertible home mortgage loan initially has an adjustable rate, but can be converted to a fixed rate during a certain period of the loan's term. This is a good type of loan to choose if interest rates are high but are expected to drop. You can enjoy the comparatively low interest rate of an adjustable rate home mortgage, then lock in an attractively low fixed rate for the rest of the life of the loan.
A balloon home mortgage begins with an introductory period during which you pay a fixed rate, but rather than paying the usual high interest rate for a fixed rate loan, you pay an interest rate almost as low as that for an adjustable rate mortgage loan. However, at the end of the introductory period, the entire remaining balance of the loan is due. Balloon loans are ideal for real estate investors who plan to resell the property before the end of the introductory period, or for homeowners who plan to refinance within the next few years.