Types of Mortgages March 17
Buying a home is not a easiest thing so a little bit of knowledge can make the process easier. According to wikipedia: “A mortgage is a method of using property (real or personal) as security for the payment of a debt.” Chances are if you are buying a house you will most likely need a mortgage unless you have the money and want to pay for the house in cash. There are different types of mortgages. The most common are fixed interest with fixed payments and other is ARM or Adjustable Rate Mortgage.
In a Fixed rate mortgage the interest rate of the mortgage is locked in for the life of the mortgage loan. This is usually the most popular option as the mortgage payments do not change and it provides for easier budgeting. Additionally if you know that the interest rates are going to go higher then this might be the best option.
In an Adjustable Rate Mortgage the interest rate of the mortgage loan keeps fluctuating and it usually provides a low initial interest rate. If you know that the interest rates are going downhill this might be a better option than fixed rate mortgage as you will not have to refinance to take advantage of the dropping interest rates. Also if you plan to be in your house for a short time this might again be a better option. An ARM or Adjustable Rate Mortgage is usually avoided on a long term investment as the payments keep changing frequently and significantly. So if you want to avoid the risk of increasing payments, you might want to stay away from ARM loans.
The different types of ARM mortgages are
- 3 1 ARM in which the interest rate is fixed for three years and then it may change once per year.
- 5 1 ARM in which the interest rate is fixed for five years and then it may change once per year.
- 10 1 ARM in which the interest rate is fixed for ten years and then it may change once per year.
Other types of common mortgages are 80/20 mortgages. In a 80 20 mortgage there are two loans one of 80% and the other of 20% which equal 100% of the total loan. The first mortgage is 80% of the purchase price of the house and the second mortgage is 20% of the purchase price of the home. In this case the 20% mortgage usually has a higher interest rate. You could also have a 5% or 10% down on the second mortgage which could make it a 80 15 5 mortgage or a 80 10 10 mortgage respectively. This type of mortgage is beneficial for the first time buyer who wants to avoid the PMI (Private Mortgage Insurance) and doesn’t want to put a whole lot of money as down payment.
With all these different types of loans it is wise to shop around to make sure which loans fits your situation and offers you money savings.