Follow this guide to break down the different types of loans, their advantages and disadvantages, and how to know if it’s right for your mortgage needs.
What are Fixed Rate Mortgages?
For the conservative borrower, the fixed-rate mortgage is perhaps the most common type of home loan. It gets paid off over a set amount of time (15, 20, 30 years), at a set interest rate so the borrower always knows what to expect. There is comfort in the fact that market rates will rise and fall, but the interest rate remains constant. This is the real selling feature of this mortgage type. It is ideal for those home buyers that are purchasing their forever home, or at least plan on settling in for many years.
30-Year Fixed Rate Mortgage
One of the more common fixed rate loan options is the 30-year loan. This loan is ideal for homeowners who are looking to settle down in a forever home. Families with children often choose this type of loan term for its smaller monthly payments. The fixed rate of the loan will remain in place throughout the entire 30-year span, thereby affording you a consistent payment amount each month.
15-Year Fixed Rate Mortgage
If you've recently acquired a high-paying job or are looking to pay off your home as quickly as possible, you may want to consider a 15-year fixed mortgage. Because of the larger payments and quicker payoff, a 15-year fixed rate mortgage will also come with lower interest rates than a 30-year mortgage. This type of mortgage payment is ideal for people who come into large sums of money through settlements, winnings, or family inheritance.
What’s a Balloon Mortgage?
A balloon mortgage is similar to a 30-year fixed rate mortgage for the first 5 to 7 years. This means that you will have traditional payments and interest rates that remain the same. Once this set period has passed, the remaining balance of your home is due. That remaining balance is a large sum of money, hence the term "balloon payment." This final payment will give you complete ownership of the home and many use this option to quickly pay off a home. If you cannot afford to make the balloon payment at the end of the loan, you can refinance the mortgage at the current interest rate and extend the balloon payment date.
What are Adjusted Rate Mortgages – (ARMs)?
Low interest rates
If you're looking for a lower interest rate to start off, an adjusted rate mortgage may be your best option. These mortgages start off with a low interest rate that is guaranteed for a fixed amount of time. After that time has passed, the interest rate may rise or fall based on current housing markets. If you're planning on living in the home for less than 10 years, an ARM can provide you with low interest rates during the majority of that time. It will allow you to save money and pay more toward the principal of the home.
What’s a Government-Backed Mortgage?
Requirements are less stringent than those for conventional loans
Government-backed loans only require low down payments.
Government-backed loans are competitive and offer low interest rates.
With FHA loans, you are required to pay upfront mortgage insurance premium (MIP) which is 1.75% of the mortgage. You are also required to pay for mortgage insurance throughout the loan.
Complex process requiring a lot more paperwork than a conventional loan.
Going over your loan term options will help you make an informed decision that you won’t regret down the road. Choose a loan term that makes the most sense with your budget and long-term goals. Once you’ve reviewed all the loan terms, be sure to browse reviews and explore the different rates and options provided by top lenders. You can then ask yourself, “Which mortgage is right for me?”