A mortgage is a loan that must be taken out by all homebuyers. The mortgage is provided by a bank or other lending institution and gives the homebuyer the money needed to purchase the home. The mortgage then needs to be paid back by the borrower in monthly payments with interest on the loan. The term of a mortgage is generally anywhere between fifteen to thirty years.
When taking out a mortgage, the homebuyer first needs to decide what type of mortgage is right for them, as there are many. This is the biggest decision to make when getting a mortgage and the answer will be different for everybody considering that everyone has different financial needs and goals. The options for mortgages are: interest only loans, adjustable rate mortgages (ARMs), pay option ARM loans, balloons, fixed rate loans, extendable balloons, conventional loans, and FHA loans. These are just a few types of mortgages that are available.
A fixed rate mortgage provides for the most security. A fixed rate mortgage is a mortgage that will have the same interest rate for the entire life of the loan. This is often a good choice for a lot of people as they will always know what their interest rate and payments will be. Fixed rate mortgages may not be the best option however if the homebuyer knows that they will only be living in the home for a few years.
An ARM loan has a variable interest rate. They will often have a smaller up front payment and smaller monthly payments, due to a lower interest rate. The interest rate for these types of loans are decided on using an interest index and a predetermined margin. ARMs can be the best choice for homebuyers if the homebuyer knows that they will not be living in the home for more than three or four years. Because there is no way to predict what the interest rates will be, these types of loans do not provide as much security as a fixed rate mortgage.
Interest only mortgages only cover the costs of the interest on the loan. This is the option most used by real estate investors who will not be living in the home. These loans provide for a lot of flexibility as the monthly payments only cover the interest due.
A Pay Option ARM has a variable rate and allows the homeowner four options for payment every month. These options are interest only, minimum payment, 30-year fully amortizing payment, or 15-year fully amortizing payment. These loans will be best suited to those who are self-employed as they can adjust their payments depending on how much income they earned that month. Pay Option ARMs can quickly collect negative amortization, making the amount of the loan increase rather than decrease and so, these types of mortgages need to be very carefully considered before an agreement is entered into.
FHA loans are suitable for first-time homebuyers or those who have no or bad credit. These mortgages tend to have very good interest rates as the federal government insures the loan for the lenders.
Understanding the different types of mortgages and the homeowner’s individual needs is critical when deciding on what type of mortgage is the right one for any given situation.
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