Understanding Your Mortgage Options
Thinking mortgage? The first step is understanding your options. So let’s take a look at just some of the basic types of mortgages out there, and see if we can figure out what’s right for you:
Fixed Rate Mortgages
Fixed rates are the most common — and generally the safest and most straightforward — mortgage program, where interest and principal payments never change. If you can afford a fully amortizable fixed rate mortgage (generally featuring higher interest payments), you sign the papers, set an automatic monthly principal and interest payment for the next couple of decades, and enjoy your new home with fewer worries (property tax and insurance payments still increase). Fixed rates simply make it easier to plan your financial future.
You usually see fixed rate mortgages available for 30, 20, 15 or 10 year terms. Some homeowners prefer “bi-weekly mortgages,” which call for smaller payments every two weeks, but cut the loan term nearly in half.
Adjusted Rated Mortgages
ARM loans start off with an interest rate that is usually somewhere around 1-2 percent lower than comparable fixed rate mortgages. This allows you to buy a more expensive home than might otherwise, since the money not spent on interest can be put towards a larger down payment.
Unfortunately — and where homeowners sometimes get into trouble — the interest rates on adjustable rate mortgages are subject to market conditions, and can fluctuate at intervals specified in the contract (usually once a year). Some homeowners are rewarded for their risk-taking, and actually end up paying less interest over time compared to the beginning of the loan. But often the opposite happens, which has helped fuel the recent housing crisis.
Similar to fixed rate mortgages, balloon loans feature stable payments throughout the term of the loan. But balloon mortgages don’t fully amortize over the length of the term, meaning there will still be principal left to pay-off after the original term of the loan is over.
So where homeowners with 30 or 15-year fixed rate mortgages will usually fully own their homes at the end of their loans, balloon loan homeowners will usually have to refinance in order to pay off the principal.
Balloon loans are short term mortgages, usually with terms of 5 to 7 years. Homeowners who have been consistently on-time with their payments can often convert to 30-year fixed rate at the end of the term — an option sometimes called a 7/23 Convertible or 5/35 Convertible.
Learn more about all types of mortgage programs available on TexasLending.com.
There isn’t a single best mortgage for everyone. What you’ll want depends on several factors unique to you, including your current financial outlook, how long you think you’ll want to keep the house, and how willing you are to take on the risk of an increasing payment.