Fixed Rate Mortgages (FRM) are generally offered for a variety of terms, but 15 and 30-year loans are the most common. The FRM carries an interest rate that is set before the time of the loan, and remains constant for the length of the mortgage. To the borrower, the big advantage of an FRM is that the rate remains the same and monthly payments are fixed. This eliminates the risk that a buyer will have to pay a higher interest payment in the future. The lender is taking a risk in that if interest rates rise, it will have to carry the loan at below the market interest rate. The borrower also takes a risk that interest rates may also fall during the payoff period, and will be stuck paying the higher rate for the remainder of the loan. In many cases, however, the borrower can refinance the mortgage and receive a lower interest rate. Fixed Rate Mortgages for 15 or 30-year terms may make sense to a buyer who has no intention of moving within a short period of time.
Adjustable Rate Mortgages (ARM) feature an interest rate that adjusts up or down as market conditions change. ARMs usually offer a lower interest rate than a fixed mortgage, but the monthly payments are subject to change, either semi-annually or annually, based on an index or formula such as the U.S. Government’s Treasury Index. The ARM’s attraction is that it will offer an initial fixed mortgage rate and a fixed monthly payment. It usually carries a lower interest rate and lower payment, in exchange for the buyer taking the risk that rates may rise in the future. In many cases, lenders may offer low “teaser” introductory rates, or a discounted rate for up to 12 months. Most ARMs also carry a “cap”, which represents the upper limit on the rate that may be charged. Borrowers considering an ARM should understand how often the mortgage will adjust, and how much the payment can change over the life of the mortgage.
Balloon Mortgages offer lower interest rates for shorter periods of financing, usually for periods of seven years. They require refinancing at the end of the term.
Bi-weekly Mortgages require a loan payment every two weeks, but it pays off more quickly, which could save thousands of dollars in interest.
Two-Step Mortgages allow payment at a fixed interest rate for five to seven years, and then adjust to a new interest rate for the remaining period, usually 23-25 years. The Balloon Mortgage and the Two-Step Mortgage may be ideal for buyers of homes who plan to move within a few years.
Interest-Only Mortgages allow the homebuyer to pay only the interest on the loan for a specified period – often five or seven years. At the end of that time, the borrower refinances, pays off the loan in a lump sum, or starts making payments on both the principal and the interest. Because the monthly amount due will skyrocket after the initial interest-only period, these loans are best suited for people who can confidently expect to earn a lot more money in a few years, or people on commission, whose income might be sporadic, and who will make interest-only payments during lean times and pay more when their cash flow permits.
