If you are buying a home, it’s a good idea to make sure you firmly understand the options you have with regard to the types of home loans. Between the various home loan types, there are important differences. By making sure you choose the right type of home loan to fit your situation, the more money you can save.
There are three basic types of home loans:
1. FIXED RATE MORTGAGE: A fixed-rate mortgage, also called FRM or simply fixed rate, is a very traditional type of loan. You apply for the loan and you are offered an interest rate based on your credit history and an amount based on what you need the money for, your current income, and your ability to repay the loan. These terms stick for the life of the loan. On the plus side, having a fixed rate mortgage allows you to budget more easily as you always know exactly how much you’ll spend. Further, the amount of your payment today will impact your finances much less in the future because of inflation. However, if interest rates do go down, you could end up stuck with a higher interest rate than you would have had comparatively. While you could always refinance, because of the fees involved with doing so, you may not be able to take full advantage of refinancing.
2. ADJUSTABLE RATE MORTGAGE: You could also consider taking an adjustable rate mortgage or ARM. This type of home loan is one that has an interest rate that fluctuates in time with the market. Once upon a time, an adjustable rate mortgage could afford you an exceptionally low monthly payment, especially since most ARMs include a lower introductory rate for the first two years. However, when the market tanked, adjustable rate mortgage interest rates went through the roof. While you may need or prefer a smaller payment today, spending a little more for security may be a good idea. That said, if you plan on selling your home or otherwise paying it off within a relatively short time, an adjustable-rate mortgage might be right for you.
3. BALLOON MORTGAGE: Lastly, consider a balloon rate mortgage. These mortgages are typically shorter term (usually 7 to 10 years) and require a very large payment at the end of the term. This type of line is rarely offered anymore as there is a major risk of not being able to make that final payment. While you could always consider taking out another loan for that lump sum payment at the end of the line, the problem is that most people don’t. As such, this type of loan structure tends to favor people who know they will come into a sum of money in the next 7 to 10 years, such as a person preparing to retire, or in line for a sizable inheritance.
It would be advisable for you to consult with your CPA or a Financial Advisor if you’re not sure which loan type is best suited to your particular circumstances.