Which Mortgage Loan Is Best For You?
There are so many different types of mortgages out there; which one do you choose? Determining which mortgage is best for you can be frustrating and confusing. It is a very good idea to research different types of mortgages and understand the mortgages that are available and what the disadvantages and advantages are for each type of mortgage. I’m going to talk about the more commonly used mortgages of today (Mortgage Calculator, 2013).
Let’s first talk about a Two-Step Mortgage. This type of mortgage is an adjustable rate mortgage that has the same interest rate for a portion of the mortgage and another interest rate for the remainder of the mortgage. The fluctuation in the current market rates dictates the interest rate. The homeowner (borrower) may have the option to choose between a fixed interest rate or a variable interest rate at the time of the adjustment date. The risk involved is that the homeowner may experience an upward adjustment after the date of the fixed-interest rate period has expired. Many homeowners who choose a two-step mortgage plan on moving out of the home before the expiration date or refinancing (Mortgage Calculator, 2013).
A fixed rate mortgage is the type of mortgage where the interest rate remains the same throughout the entirety of the loan. The interest rate does not fluctuate at all for a predetermined amount of time during the life of the loan. Fixed rate mortgages are the most popular types of mortgages and seventy-five percent of homeowners choose fixed rate mortgages. The terms for fixed rate mortgages are typically ten, fifteen, and thirty year terms. One of the biggest advantages of choosing a fixed rate mortgage is that the borrower knows exactly when the principal and interest rate payments will be for the life of the loan. This makes it easier for the borrower to budget. Fixed rate mortgages are also the most predictable of all of the mortgage choices out there, but the interest rates on fixed rate mortgages are higher than other types of mortgages (Mortgage Calculator, 2013).
Balloon mortgages are termed for a much shorter amount of time than other mortgages. They are similar to fixed rate mortgages because the monthly payments are lower due to the large balloon payment at the end of the term. The interest is being paid on a monthly basis, and these mortgages are great for homeowners who are responsible and have the intention of selling the home before the end of the term or the due date of the large balloon payment. The risk that a borrower faces is that if they are not responsible and are required to refinance through the lender of the original loan because they can’t afford the large balloon payment (Mortgage Calculator, 2013).
Ten-one adjustable rate mortgages have an initial rate that is fixed for the initial ten years of the loan. Once the ten years is up, the rate will be adjusted each year after for the remainder of the life of the loan. This mortgage type is best for homeowners who plan to own the home for more than ten years (Mortgage Calculator, 2013).
The five-twenty-five mortgage is also known as a thirty due in five. For five years the monthly payment and the interest rate do not fluctuate or change. The interest rate is then adjusted according to the current market interest rate at the beginning of the sixth year. If the borrower can deal with a single change of payment during the term of the loan, this is a good loan for them because the remainder of the term the interest rate will not change again (Mortgage Calculator, 2013).
The last mortgage that I will talk about is the one year adjustable rate mortgage. After a “fixed period” the interest rate changes based on a certain schedule. This type of mortgage is considered to be one of the riskier loans because the monthly payment can drastically change. Due to the risky nature of this type of mortgage, the borrower is offered a lower interest rate as a reward for taking the risk. On the anniversary of the loan, the interest rate changes every year. Getting a one-year adjustable mortgage loan allows the borrower to obtain a loan amount that is higher which allows them to purchase a larger more valuable home. Most homeowners that have really high mortgages can refinance their mortgages every year. The mortgage payments are lower and they can buy a more expensive home (Mortgage Calculator, 2013).
So there you have it! Now that you know the different types of mortgage loans that are out there, you can choose which option best suits your needs! Good luck buying!!
Mortgage Calculator. (2013). Types of Mortgages: Which One is the Right One? Retrieved from http://www.mortgagecalculator.org/helpful-advice/types-of-mortgages.php.
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