Types of mortgage loans

What types of loans are available and what are the advantages of each?

Fixed Rate Mortgages: Payments remain the same for the the life of the loan

Types
  • 15-year
  • 30-year

Advantages
  • Predictable
  • Housing cost remains unaffected by interest rate changes and inflation.

Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits

Types
  • Balloon Mortgage- Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
  • Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan ARMS linked to a specific index or margin

Advantages
  • Generally offer lower initial interest rates
  • Monthly payments can be lower
  • May allow borrower to qualify for a larger loan amount

When do ARMs make sense?

An ARM may make sense If you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.

What are the advantages of 15 and 30 year loan terms?

30-Year:

In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

15-year:

Loan is usually made at a lower interest rate.
Equity is built faster because early payments pay more principal.

Can I pay off my loan ahead of schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.


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