Types of Mortgages
When we talk about types of mortgages, we are talking essentially about the terms offered by lenders. Traditionally, the terms were more or less limited to a 30-year mortgage with a fixed interest rate. As you probably know, there are a few hundred different mortgage options now.When discussing different types of mortgages, it is always wise to start with the bell weather loan. This would be the 30 year fixed rate mortgage. If you choose this loan, you agree to pay the debt back through monthly payments spread over 360 months or 30 years. The interest rates remain the same throughout the pay back period. The advantage of this loan is you always know your monthly cost. The downside is it takes a long time to pay it back and you can end up paying more interest over the life of the loan because of a higher interest rate than our next loan.Our next mortgage is the adjustable rate mortgage. With this loan, the interest rate charged on the debt fluctuates based on a number of factors. The interest rate is often less than that found with a fixed rate loan, but you run the risk of the rate increasing above the fixed rate if the cost of borrowing money goes up. Essentially, you are making an educated bet as to borrowing costs in the future.With both the fixed and adjustable rate loans, you can now get interesting terms. If you can afford to, you can now cut the payback period to 5, 10 or 15 years. This means more of your monthly payment goes to the principal of the loan versus paying interest. You can also start off with an adjustable loan and then refinance if interest rates go up above those being offered with fixed rate loans. Put simply, you now have flexibility.A popular new loan on the market is the interest only loan. With this loan, you only pay back the interest charges each month on the loan. After a set time, say five years, you are then required to pay back the principal in full, often by selling or refinancing. The advantage of this loan is it lets you qualify for larger mortgages or make smaller monthly payments. The disadvantage is you never pay down the mortgage you owe. So, why would people want such a mortgage? They are essentially betting that the home they are buying will appreciate enough to create a profit on the home. Sometimes it works out, sometimes it does not.
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