A Guide To The Types Of Home Mortgages

A Guide To The Types Of Home Mortgages

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Buyers can choose from a broad array of home mortgages. Even first time buyers can find a mortgage tailored to their needs. However, to pick the right type of home mortgage for you, you need to know what your loan options are. This brief guide will explain the most common types on the market today.
The interest rate on an adjustable rate mortgage (ARM) rises and falls as the economy changes. Your home mortgages interest rate rises if the prime interest rate rises, and falls if the prime interest rate falls. This lets you get the maximum benefit from periods of low interest, but also means that if the prime interest rate rises sharply, your interest rate and monthly payments will rise with it. Because you, not the bank, absorb the risk of rising or falling prime interest rates, banks set the introductory interest for adjustable rate mortgage loans lower than those for fixed rate mortgages.
The interest rate on a fixed rate home mortgage does not change over the term of the loan; it is set, or fixed. This protects you from the risk that interest rates will rise, but it also keeps you from getting any benefit if interest rates fall. Banks expect that at some point the prime interest rate will rise higher than your fixed rate mortgages interest rate and the bank will be forced to pay the shortfall out of its own pocket. Because banks must budget for this eventuality, they offer higher interest rates on fixed rate mortgage loans than on adjustable rate mortgages.
A convertible home mortgage loan initially has an adjustable rate, but can be converted to a fixed rate during a certain period of the loans term. If interest rates are high but you expect them to drop shortly, this is a good loan type to choose. You can enjoy the comparatively low interest rate of an adjustable rate home mortgage, then lock in an attractively low fixed rate for the rest of the life of the loan.
A balloon home mortgage begins with an unusual introductory period during with you pay a fixed rate that is almost as low as that for an adjustable rate mortgage loan, instead of paying the higher interest rate of a normal fixed rate loan. However, when the introductory period ends, you owe the total unpaid balance of the loan. Balloon loans are ideal for real estate investors who plan to resell the property before the end of the introductory period, or for homeowners who plan to refinance within the next few years.

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