Types Of Mortgage Loans

Although you may see many different types of loans out there, they basically fall into 2 categories: home mortgage loans that have a fixed interest rate, and those who's interest rate changes periodically throughout the term of the loan. This page will give you a better understanding of the pros and cons of each type, and what loans fall under each category.

Fixed Rate Mortgage

A fixed rate mortgage has an interest rate that is agreed upon when the mortgage is issued, and remains the same throughout the life of the loan. The main benefit of this type is that you know that your interest rates will never increase through the duration of the loan and your monthly payments will be very predictable. On the other hand, if the interest rates do drop during the life of your loan, you will not see any benefit from that.

The length (or term) of a fixed rate mortgage is uaually either 15, 20 or 30 years long, each term having its own pros and cons:

• 30-year fixed rate: This term gives you the best tax advantage beacuse it will give you the greatest interest deduction. Also, beacuse your payments are spread out longer, your monthly payments will be less if you go this route. The negative aspect is that you will end up paying more interest compared to a mortgage with a sorter term. This type of a mortgage is usually the easiest type of loan to qualify for.
• 20-year fixed rate: You will usually be able to get a lower interest rate if you chose a mortgage with a term shorter then 30 years. By choosing a shorter term, you will also have your mortgage paid off quicker, and end up paying less interest overall. A shorter mortgage will cause your monthly payments to be higher though.
• 15 year fixed rate: Same benefits as teh 20 year term but your monthly payments will be higher still.

Adjustable Rate Mortgage (ARM)

With an adjustable rate mortgage, you start off with a fixed interest rate and a fixed monthly payment for some period of time, and then after that, the interest rate on the loan will vary based on market conditions. You will usually be able to secure a lower initial interest rate than with a fixed mortgage, but the risk comes with the uncertainty of what your rate will be after the initial period. An adjustable rate mortgage is often a good idea for buyers who only plan on staying in the home for a short time before reselling.

The terms of your loan will determine your initial fixed interest rate and how often it will change. For example, a 5/1 ARM will have a fixed interest rate for the first five years, and then each year after that the interest rate will change. To help guard against soaring monthly payments, you can look for features such as an interest rate cap or a monthly payment cap.

Balloon Loan

A balloon loan is a sort term, fixed rate loan that lets you make small payments for an introductory period of time. After this time is up, you are required to either refinance the remainder of the loan or pay off the remaining balance with one lump-sum. The introductory period for a balloon loan is usually between 5 and 10 years.

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