Whether you’re a first or a fifth-time home buyer, navigating what seems to be a minefield of mortgage choices can be daunting. How do you choose the right one? Do you even have all the information you need to make an informed decision?
Below you’ll find information to help you understand the most common home mortgage rate types.
The Two Most Common Types of Mortgages
The two most common types of mortgages are fixed-rate and adjustable-rate. There are advantages and disadvantages to each mortgage rate type, so you’ll want to assess each option carefully in regards to your personal needs.
A fixed-rate mortgage (FRM) is exactly what it sounds like–the rate is fixed (stays the same) throughout the entire term of your mortgage. This means it is especially good for planners because it’s easy to figure out how much you need to budget each month. Fixed-rate mortgages are also better for first-time homebuyers because there are fewer variables and thus they are somewhat simpler to understand.
However, since there is one set rate for the life of the mortgage, it can be difficult for you to take advantage of lower rates if they become available–you would have to refinance, which can be a hassle. So if you want to be able to benefit from lower rates easily, a fixed-rate mortgage might not be right for you.
Also called a variable-rate mortgage, an adjustable-rate mortgage (ARM) changes according to interest rates. This can be both an advantage and a disadvantage. On the one hand, it’s easy to take advantage of falling rates–you don’t have to refinance as you would with a fixed-rate mortgage. But on the other hand, interest rates could go up, which means your mortgage payments would go up as well.
The initial rates of ARMs are usually lower than fixed-rate mortgages, but rates can rise sharply after the initial period. So while ARMs come with some risk, they can be good for homebuyers who plan to pay off their mortgage quickly and for those who don’t plan to be in their house for very long.
Other Mortgage Options
Balloon mortgages can be precarious. They have an initial period (usually seven or ten years) of low fixed payments. But after that initial period is over, the remainder of the balance is due in a lump sum.
Because of the high final payment, balloon mortgages are dangerous, especially if your job or finances are unstable. However, they can be useful if you know you’re going to have other large payments to make during the initial period, such as paying for a child’s college education.
Interest-only mortgages are those for which, in the short term, you pay nothing but the interest on the mortgage. You then have to pay back the remainder of the loan by either paying a lump sum, making much higher monthly payments, or refinancing.
Interest-only mortgages are similar to balloon mortgages and can be useful in similar situations. The main difference is that with interest-only mortgages, you are not paying anything toward the loan balance in that initial period, so the final payment may be higher, but you do have more options in how you repay the balance.
There are several other types of loan and mortgage rate types that cater to more specific needs. The information here is simply to familiarize you with some of the options available.
If you have questions or need more information, don’t hesitate to contact an Oak Bank representative.