Residential Real Estate:
The Top 6 Types of Mortgages
Fixed Interest Rate Mortgage: A loan or mortgage with an interest rate that will remain at a predetermined rate for the entire term of the loan. These are the most popular types of mortgages with buyers usually opting for 30-year fixed interest rate mortgage. They are also available in 10-, 15-, 2-, and 40-year terms.
One-Year Adjustable Rate Mortgage (ARMs): These have interest rates that change according to the financial indexes that they’re linked to. This means that your mortgage payment can increase or decrease according to the change in the index. ARMs usually have a rate cap above which the interest rate cannot go. With the one-year ARM, the interest rate can change every year, based on the index, for the entire life of the loan. The beginning interest rate is usually below-market in order to help the borrower qualify for the loan. Beware of this type of ARM, however, because interest rates could quickly rise above current market levels, leaving the borrower with a larger loan payment than he or she may be able to handle.
10/1 ARM: The interest rate of this ARM stays the same for 10 years and then, starting in the 11th year, changes each year according to the index of the loan. The first number in the name designates the period of stable payments; the second number stands for how often the interest rate will change after the initial 10 years.
30-due-in-7 Mortgage: Also known as the two-step mortgage, or the 7/23 two-step. The interest rate and monthly payment remains stable for the first 7 years; at the beginning of the 8th year, the interest rate changes to reflect the current market rate and remains fixed there for the balance of the loan. This loan can help those who expect their income to increase in the future to qualify for a larger loan right now.
5/5 and 3/3 ARMs: Again, these ARMs have a stable payment for the period of the first listed number, then the interest rate changes according to the time period designated by the second listed number. For the 3/3 ARM the first 3 years would have stable payments. Then the interest rate would change every 3 years thereafter. For the 5/5 ARM, the first 5 years would have stable payments and the interest rate would change every 5 years after that. The lengths of the time periods can be negotiated.
Balloon Mortgages:Balloon mortgages can be interest-only, partially,- or fully amortized (liquidated). However, after making payments for an agreed-upon period of time (typically 3, 5, or 7 years) the entire balance of the loan is due and payable. This can be an effective mortgage for someone that knows that they will not live in the home for longer than the payment period. If they do, they must be prepared to meet the obligation of the final balloon payment. It can generally be taken care of by refinancing.