Mortgage lenders offer a variety of loans for mortgages. The most common mortgage loans are the fixed rate and the adjustable rate. There are other types of mortgage loans - the jumbo mortgage, twostep mortgage, balloon mortgage, assumable mortgage, and construction mortgage.
Fixed rate mortgages are usually offered for 15-year or 30-year terms. That means if you pay the mortgage every month, after the 15 or 30 years the mortgage is paid off. Lenders are now offering additional mortgages for over 30-year terms in order to spread out the amount of monthly payments for the more expensive homes.
The advantage of fixed rate mortgages is that the buyer knows how much each mortgage payment will be. The mortgage is not affected when interest rates go up or down. This gives the buyer stability in his or her budget and allows him or her to plan for costs years in advance.
On the negative side, in a fixed rate mortgage the borrower builds equity in the home at a very slow rate. That is because of the way the loan is amortized (calculated). Mortgage payments are not split evenly between paying off interest and principle - the amortization table pays more on interest in the early years so the lender gets its money back first.
For a 30-year loan, the first 23 years of the loan the buyer is paying off more of the interest, which is deductible on the buyer’s income tax. For the 15-year loan, it is usually made at a lower interest rate, which makes payments higher than the same loan would be for 30 years. In 15-year mortgage loans, the equity that the borrower has in the house increases faster than in the 30-year mortgage, but the payments are larger.
Right now, in a buyer’s market when mortgage rates are going up, the fixed rate mortgage is considered the gold standard, the one most buyers want. The only concern with a fixed rate mortgage is that you lock in a low rate as soon as you can.
Adjustable rate mortgages (ARMs) come in an infinite variety. The primary advantage to an adjustable rate mortgage is the lower initial interest rate (usually 2–3% lower than fixed rate mortgages) at the beginning of the mortgage. However, as the name says, this loan is adjustable and after a specified time the interest rates and payments will probably increase. ARMs calculate the interest rate based on an interest rate index such as the U.S. Treasury Bill Rate.
Because this type of loan offers lower initial interest rates, borrowers can qualify for a larger loan amount. The ARM is a good choice for people who know they will not stay in the home for a long time and for those who are sure that they can financially handle a much larger payment. ARMs usually have a rate cap that limits how much the rate can change and the number of changes allowed over a specific period of time. In an ARM the borrower is betting his or her home that the specific economic interest rate index will not rise more than the borrower can pay. In today’s economic and job climate this may be a very risky bet.
Adjustable rate mortgages come in a variety of actual loans.The most common are the interest only mortgage; 100% mortgage; convertible mortgage, which starts as an ARM with an option to convert to a fixed rate mortgage after a period of time; and, the balloon mortgage.
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Note: This article was sent to us by: Henry F. Regis at 06092010
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