In today’s housing market, getting a home loan may seem difficult. While it’s true that lenders have gotten strict about who they allow to qualify for a mortgage, once you meet their various criteria you will be faced with many mortgage options to choose from.
The most basic categories of mortgages are fixed rates and adjustable rates. These two types are very different and are intended for different types of buyers who need different things out of their mortgages. You may have heard a lot of hype about adjustable rate mortgages on the TV and how they caused the housing crisis. This isn’t true – the mortgages themselves didn’t cause the problem, the buyers did. Understanding the differences between types of mortgages is vital before making a long-term commitment.
Fixed rate mortgages are the type with an interest rate that stays the same throughout the repayment period. The repayment period is usually either 15, 20 or 30 years and the interest rates tend to be higher with these mortgages. The upside is that during the entire repayment period, the interest rate will never change, regardless of the market. These mortgages are best for people who have good credit, need a large loan or would like to have the peace of mind knowing that their rates will never change.
Adjustable rate mortgages are home loans whose interest rates fluctuate depending on the market. Typically, when the economy is doing well, interest rates tend to be higher. When the economy is doing poorly, interest rates tend to be lower. This type of mortgage is attractive initially because of its low introductory rate, however the rates can skyrocket, causing payments to balloon. Some adjustable rate mortgages cap the high and low points for interest rates. Adjustable rate mortgages are good for people with poor credit, people who are certain they will refinance in a short time or people who feel the interest rates will fall in the future.
Now that you understand the basic two categories of mortgages, lets take a look at the 5 most popular types of loans that exist.
1.) Graduated Payment Mortgage – With this type of loan, payments increase on a monthly basis for a set period of time – usually around 5 years. The last payment is usually set where the remainder of the monthly payments will be. This type of loan tends to have a higher interest rate and can be either fixed or adjustable rate.
2.) Interest Only Mortgage – Like the name implies, with this type of mortgage you pay only the interest for a certain period of time. After that, you pay interest plus principal.
3.) Reverse Mortgage – These are the types of mortgages that you probably see commercials for on TV. They allow elderly people to have access to the equity in their homes without selling.
4.) Convertible Adjustable Rate Mortgage – This is a typical adjustable rate mortgage, however it has the flexibility to transform into a fixed rate mortgage at a specified time.
5.) Piggyback Loan – A piggyback loan is a small loan that is both the down payment and mortgage. It isn’t a popular option for most buyers.
When buying your next home, be aware of all the mortgage options available and make an informed decision. Different mortgages are right for different people at different points in their lives. Review your options carefully and choose the best fit for you.