Adjustable rate mortgages
There are basically two types of mortgages: fixed rate and adjustable rate. Fixed rate mortgages are traditional loans with fixed interest rates over the life of the loan. The length of repayment may be anywhere from 10 to 30 years. Your monthly payment for interest and principal will never change, but if you have your insurance and taxes in escrow, you may see a slight change over time. Down payments usually run 20%, but you could pay as little as 5% down with certain loan programs. Fixed rate mortgages offer predictable payments and are especially nice if you take the mortgage out during a low interest rate period.
Adjustable rate mortgages (ARMs) start out with a low interest rate, but the rate and payments may go up or down depending on the market interest rates. Most ARMs are adjusted every year, but there are some out there that adjust more frequently. The mortgage usually is capped for how much the interest rate can be raised each time and over the life of the loan. For example, you may take out a ARM that has a 2/8 cap. This mortgage can adjust only 2 points at the maximum each year. Over the life of the loan, the mortgage can only go up by a total 8 points. If your interest starts out at 7%, the second year it could increase to 9%, and increase each year thereafter until it reaches a maximum of 15%. That is if rates continue up. The interest rate could also go down.
ARMs are great for those who want more of a house, knowing their income will go up in the next few years. But be aware that when rates go up, the payment amounts go up. You need to make sure you could make the payments if the mortgage was to reach it's peak rate.
Fixed Rate Mortgage Loans
Mortgage loans that offer fixed interest rates are the most common type of loan for new home buyers. Since the interest rates are stable, long term homeowners can budget their finances accordingly because they will be safeguarded against rising interest rates. Along with fixed rates that are determined by the market, this type of loan involves little risk and offers long term low monthly payments that are protected from the effects of inflation.
Though appealing to most, fixed rate mortgage loans are not for everyone. Other types of mortgage loans allow you to borrow more than you could with a fixed rate mortgage. If your stay in the home that you are borrowing against is short in tenure, then you would probably end up paying more in interest than you would if you chose a variable rate mortgage.
Finally, with fixed interest rates, you are committed to that rate for the duration of your mortgage, even if the market rate drops sometime in the future.
Keep in mind that the first offer you receive is not always the best. Take your time, explore all options from many different lenders, and decide which policy best suits your needs. It is always fine to say "no."
There are also balloon mortgages and jumbo loans available out there. Balloon mortgages are good for those who know they will be moving in a few years. Jumbo loans are a larger than average loan for those who want to borrow more than the average mortgage amount. There are also option ARMs that allow you to pay only a minimum payment amount for a certain period of time. These loans all come with more risk and must be thought out carefully!
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