The 4 Types of Mortgage Loans

If you are looking to purchase a new home, there are many types of mortgage loans that you may be interested in which could serve this purpose. Buying a property is a serious matter and it's important to learn which one suits your needs best.

Fixed-Rate Mortgage

This is one of the most popular types of mortgage loans as about 70 percent of home buyers choose this option. As the name implies, the interest rate of this type of loan is a fixed rate at theception date and applications for the life or tenor of the mortgage loan. The obvious advantage of having a fixed rate allows home buyers to manage their expenses better since the monthly repayment of principal and interest is constant through the mortgage loan.

Adjustable Rate Mortgage (ARM)

This is another popular type of loan with the interest rate fixed to an index. This index is not fixed and it fluctuates with the market rates. Whenever the market rate increases the loan repayment rate arises accordingly. Similarly, when it decreases, you will also get the benefit of paying your payment at a lower rate. To prevent too much fluctuation if and when the financial market behaves erratically, a cap will be placed on such mortgage loans so as to limit these abnormal rate variations.

In an extension of ARM loans there is another type of loan called flexible payment ARMs. There is no cap placed on them but these loans' interest rates vary monthly, allowing borrowers some flexibility. The mortgage payments usually start low at the beginning but slowly rise to sometimes exceptionally high rates over a period. It may be beneficial for homeowners who are just starting out in their careers and expect job stability in later years.

Balloon Mortgages

Similar to the fixed rate mortgage loans, balloon mortgages have a fixed and structured repayment schedule. The only difference between the two is that this type of loans follows a much shorter loan term usually in the time duration of five to seven years. Once this period is completed it leaves with an outstanding balance of the loan called the balloon payment.

Interest-only-Mortgages

Interest-only mortgages are types of mortgage loans that allow borrowers more flexibility on their repayment schedule. They simply pay the loan interest for an agreed period of time without including the loan principal. This means the homeowner gets to enjoy paying lower monthly payment over a short-term duration. However once this interest-only time period is over, payments are expected to increase quite significantly as it now includes the principal sum of the mortgage loan.

As you can see, understanding what options you have on the various types of mortgage loans is important so that you can make a good decision. After all it's going to be a long-term commitment for you and doing some homework now helps to make owning your dream home hassle free.

Source by P Lee

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