Different types of mortgages
August 20, 2016 9:25 am
Real estate is a huge investment – it is a long-term commitment that entails much needed planning and research, especially when it comes to managing one’s finances. There is a myriad of mortgage plans offered by banks and here’s a beginner’s guide on the different types of mortgages to get you started.
The Basics: Fixed-rate Mortgage & Adjustable Rate Mortgage
When you avail of a fixed-rate mortgage, the interest rate doesn’t change over a fixed number of years. This type of mortgage is easier to budget and manage, as you know that the monthly payment will stay the same throughout. The risk however, is that in the event that interest rates fall, you won’t be able to benefit. Fixed-rate mortgages also tend to be slightly higher than variable rate mortgages, and they can be paid off in 10, 15, 20 or 30 years.
An adjustable rate mortgage, also known as a variable-rate mortgage or tracker mortgage, is more dynamic and the rate varies throughout the duration of the loan. The interest of ARMs usually comes at a lower initial rate compared to a fixed-rate mortgage. With this kind of mortgage, you need to be prepared for varying monthly payments.
A combination of a fixed-rate mortgage and an adjustable rate mortgage – a hybrid mortgage works in a way that, for an x number of years, your mortgage will be at a fixed interest rate, and then it’ll switch back to an adjustable rate.
Other Types of Mortgage Products
- FHA (Federal Housing Administration) – Loans from the FHA come with a significantly lower down payment requirement, which makes it a desirable option for most homebuyers who are working on a budget. However, it is important to note that the sizes of these loans are limited.
- VA – Backed by the United States Department of Veterans Affairs, this loan can be acquired by eligible applicants such as veterans and active duty service members. The loan requires no down payment. You can use a VA home loan to buy or build a home or to make improvements on it.
- Balloon mortgage – This mortgage comes at a fixed-rate, and has significantly lower monthly payments for the first years, with the balance of the loan being due at the end of the term, which is typically just a short period of time.
- Reverse mortgage – This loan allows for cash payments to be given to the homeowner, based on their home equity. Before going forth with this type of mortgage, make sure that the loan is federally insured and avoid falling prey to scammers who usually target senior citizens wanting to make the most of their property’s equity while they still can.
