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Learn About Mortgages

Fixed-Rate Mortgages

These mortgages, with a fixed percentage rate, and a fixed loan
amount are usually carry higher rates than other types of mortgages,
but they offer the security and certainty of knowing your monthly
payment and interest rate will not change.

Adjustable-Rate Mortgages

These mortgages (also known as ARMs) have a variable interest rate
and monthly payments that are recalculated on a regular basis to
reflect changes in the market interest rate. These rates are typically
lower than the rates in fixed-rate mortgages, but expose you to the risk
that market interest rates may rise in the future.

Balloon Mortgages

A Balloon Mortgage has a fixed-interest rate and payment, but the term
of the payments is only five to seven years. After this time, the entire
balance of the loan becomes due. If you don't have the money to pay
back the loan after the initial term, and you can't get another mortgage,
you're stuck.
Balloon Mortgages are typically used as a last resort by those who
can't qualify for a fixed- or adjustable-rate mortgage. They also are
used by those who may have the assets to pay for a home outright, but
want to avoid liquidating those assets because they may be providing a
higher return on investment than the percentage rate of the loan.

Fixed Rate Mortgages

The basic, tried-and-true, no-surprises mortgage is the Fixed-Rate
Mortgage. Your monthly payment is the same, every month of the
entire length of the loan.

Advantages

You can rest assured your rates won't go up, and your payments will
stay the same.

Disadvantages

They typically have a higher interest rate. The lenders are assuming
the risk that the market rate may go up, and you'll be locked in at a
lower rate. As a result, these types of mortgages have a premium for
offering the security of the fixed rate.
They are harder to obtain. Since your interest rate, and hence your
initial payments, are higher than another type of mortgage, you won't
be able to borrow as much as you could with another type of loan.

Common Fixed-Rate Mortgages

The 30-Year Fixed-Rate Mortgage
With 30 years to pay off the loan, these loans allow you to borrow more
money for the same monthly payment than shorter loans. They may
also make it possible to have a lower down payment, because the
down payment will affect your monthly payment less.

The 15-Year Fixed-Rate Mortgage

With 15 years to pay off the loan, these loans may require a higher
monthly payment and down payments than their 30-year counterparts,
or are suitable for lower-priced homes. If you can make a higher down
payment, or can afford a higher monthly payment, or the value of your
home puts your monthly payments into your budget range, a 15-year
Fixed-Rate Mortgage may be for you. Since the term of the loan is half
as long, you can make significant savings on the total amount of
interest paid on the loan.

Adjustable Rate Mortgages

ARMs allow you to fix the interest rate for the length of time that you
plan to hold the loan without paying extra for interest rate protection
you don't need.

Advantages

They typically have a lower interest rate. Since the lender is assuming
less risk on the possibility of interest rates going up, they offer lower
interest rates, which translates to a lower monthly payment on a similar
term fixed rate mortgage.
The initial rate on an ARM is fixed. The shorter the initial fixed period,
the lower the initial rate can be.
You can borrow more with an ARM than a Fixed Rate Mortgage. If
you're just outside the range of your dream home, an ARM can make
all the difference.

Disadvantages

Your interest rates may go up. If the market takes a turn for the worse,
or you keep your mortgage longer than you intended (that is, you
decide to stay in the house longer than the initial fixed interest rate,
instead of selling the house and the mortgage to another buyer), you
may be stuck with larger payments. In other words, if you initially plan
to stay in the house you're buying for five years, and get a loan with a
five year fixed initial interest rate, and you end up staying longer, your
interest rates may rise if the market rates go up.
Common ARMs
10/1 ARM
The 10 in 10/1 indicates the length of the fixed initial rate out of 30
years, and the 1 indicates that the interest rate is readjusted annually
for the remaining length of the term (in this case, 20 years).

7/1 ARM
The initial interest rate is locked for 7 years, and then annually
adjusted for the remaining 23 years.

5/1 ARM
The initial interest rate is locked for 5 years, and then annually
adjusted for the remaining 25 years.

3/1 ARM
The initial interest rate is locked for 3 years, and then annually
adjusted for the remaining 27 years.

1 Year ARM
A 30-year loan with an interest rate and monthly payments that adjust
annually.

6 Month ARM
A 30-year loan with an interest rate and monthly payments that adjust
every six months.

The shorter the initial rate is, the lower your initial monthly payment will
be, but the higher your highest possible monthly payment will be as
well.

Balloon Mortgages

Similar to a 30-year fixed rate mortgage, balloon mortgages have a
fixed rate and payment. However, after the five- or seven-year term,
you have to repay the entire loan balance.

Advantages

It is easier to qualify. Since the loan is effectively a short term loan (no
more than seven years) the lender is taking less risk, which makes it
easier for you to qualify for it.
It gives you five to seven years of protection from rate increases.
Since it is relatively less risk for lenders, they are willing to lend more
for balloon mortgages. If you can barely afford your dream home, this
can make all the difference.

Disadvantages

You must refinance your mortgage, sell your home, or pay the
remaining amount of the loan after five or seven years. This means
one of three things:
If you decide to refinance your mortgage, and the interest rates have
gone up, you'll end up with a higher interest rate. In this scenario, you
may have been better off with a 10-year ARM or a Fixed-Rate
Mortgage.
If you sell your home, and the housing market has taken a turn for the
worse, you may not be able to get enough out of the sale of your home
to pay off the remaining amount of your debt.
You will have to come up with a large sum of money if you decide to
pay the remaining amount of the loan (after five or seven years)
without refinancing or selling your home. Most people who apply for
balloon mortgages have a difficult time qualifying in the first place, so it
may be difficult to refinance the home when the balance is due, leaving
them in a serious bind.

Common Balloon Mortgages

5-Year Balloon

A loan with a fixed interest rate and monthly payment for five years.
After that, the balance of the loan becomes due in one "balloon"
payment.

7-Year Balloon

A loan with a fixed interest rate and monthly payment for seven years.
After that, the balance of the loan becomes due in one "balloon"
payment.