You have a lot of mortgage options to sift through when you’re buying a home, and making a decision can feel overwhelming. Here is some information to help you understand different kinds of home loans and find the best mortgage for you.
Fixed-rate mortgages
As the name suggests, the interest rate on a fixed-rate mortgage stays the same throughout the term of the loan. Fixed-rate mortgages appeal to people who:
- Will likely stay in their home for more than three or four years.
- Want to know that their payments will stay the same over the life of the loan.
Most fixed-rate mortgages are for terms of 30 or 15 years; the interest rate on the shorter-term loan is less, reducing the overall cost of the loan for people who can afford the higher monthly payments.
Adjustable-rate mortgages
Monthly payments on an adjustable-rate mortgage can adjust up or down depending on market conditions. Hybrid adjustable-rate mortgages (ARM) have an interest rate that does not change for several years (the fixed term), after which it adjusts every year for the life of the loan. The most common hybrid mortgages are 3/1 and 5/1 mortgages which have a fixed rate of three years and five years, respectively, and then adjust annually after the fixed term expires. A Hybrid ARM may appeal to:
- People who know they will be in their homes for less than the fixed period.
- Buyers who want significant savings on interest early in the loan. They may plan to refinance or sell before the rate adjusts and are willing to take the risk that they will be able to do so.
- Buyers who believe interest rates will go down.
- Buyers who will be able to afford potentially higher payments when the rate adjusts.
Interest-only and balloon mortgages
Interest-only and balloon mortgages allow you to make lower payments for a number of years. But you won't pay down principal on an interest-only loan, and eventually your payments will increase after the interest-only period expires (usually five to ten years). A balloon mortgage offers low regular payments for a number of years, but then requires you to pay off the principal all at once.
Interest-only or balloon mortgages may work if:
- You expect a financial windfall down the road that will allow you to pay off or pay down your mortgage.
- You have a temporary financial crunch and will be able to afford higher payments when the interest-only period ends or will be able to pay off the loan prior to the balloon coming due.
- You plan to sell before the interest-only period or balloon term expires.
Keep in mind that you should carefully consider your long-term financial situation and tolerance for risk before you choose a loan.
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