What is a mortgage, and what are the
benefits of different kinds of mortgages?
Simply put, a mortgage is a loan that a home buyer obtains directly from a lender to purchase real estate. The mortgage is a lean on the property that secures a promissory note (promise to repay the debt) that states the terms of the loan, including the interest rate, and the number of payments.
The most popular mortgages available to home buyers today can be divided into two general categories: those which offer fixed interest rates and monthly payments, and those where one or both of those factors are adjustable.
Fixed rate/fixed payment loans are more traditional, and remain the most popular home financing method, currently accounting for about two-thirds of all residential mortgages. Their advantages are well known: You always know what your monthly principle and interest payment will be, so your basic housing cost will remain unaffected by interest rate changes until the mortgage is paid off.
Mortgages that entail flexible rates and/or payments have grown in popularity in recent years, primarily during periods of high interest rates and/or rapidly rising home prices. Many, including the popular ARMs (Adjustable Rate Mortgages), offer lower-than-market initial interest rates that allow buyers a measure of affordability unavailable in fixed rates loans. The tradeoff may be higher interest rates and higher monthly payments later on.
|
TYPE
|
DEFINITION
|
ADVANTAGES
|
DRAWBACKS
|
COMMENTS
|
| 30-YEAR FIXED RATE | A long-term loan in which principle and interest are amortized over 30 years; both interest rate and amount of monthly payment remain unchanged for the life of the loan. |
Considerable tax benefits, especially in early years. Payment never rise, regardless of inflation. |
Slow equity build up. | The most common mortgage in the U.S., a particularly good investment when rates are low |
| 15-YEAR FIXED RATE | As above, but payback period is 15 years. |
Usually lower interest rate than 30 years Faster equity build-up. Less interest paid out over life of loan |
Higher monthly payments. Less tax-deductible interest. |
An excellent option for middle aged and older buyers |
| ARM (Adjustable Rate Mortgage) | A mortgage whose rate changes over time according to terms specified by the lender, usually according to short-term Treasury Bill rates. |
Low initial interest rate, sometimes below market. Payment may decrease over time. |
Payment may increase over time. Risky if rates rise significantly. |
Good option for buyers whose income will rise and/or when rates are expected to drop. |
| FHA/VA MORTGAGE LOANS | Government-insured or guaranteed mortgages that can make purchase more affordable than conventional loans. |
Little or no down payment required Marginally better rate than conventional 30-year mortgages |
Lower limits on the maximum that can be borrowed. VA requires currant or past military service records. |
Good option for first time buyers with little to invest in a down payment. |
| GPM (Graduated Payment Mortgage | A fixed rate mortgage offering low initial monthly payments hat increase by predetermined amount, than level off after about five years. |
More affordable payments for first few years. Unlike ARMs, buyers knows upfront how much payments will rise in the future. |
Slower equity build-up. Buyer's income may not rise in proportion to payments. |
Another good choice for buyers who expect income to rise substantially after home is purchased. |
| BALLOON MORTGAGE | A short-term (3-5 years) loan, usually at a fixed rate, paid back on equal monthly payments and a final "balloon" payment for the remaining balance. |
Lower monthly payments. Full tax benefits. |
Little or no equity build-up; monthly payments are often for interest only. Balloon payment usually requires refinancing or selling the house. |
Designed for buyers who plan on moving within a few years and/or are confident in the short-term appreciation of a property. |
Contact Steve Neiman
888-655-2900