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Home Mortgage Loans - Fixed Rate, Adjustable or Balloon, Which One Is Right For You?
from: Carrie ReederWhen you're shopping for a new home—especially for the first time—all the terms and expressions may be confusing and difficult to understand. Adjustable rate, fixed rate, balloon payment - how do you decide which is the right type of home mortgage for you if you're not even sure what each of them are?
The name of the mortgage type usually has to do with how you'll pay for your loan - how the interest on the loan is being determined by the bank. The three major types of mortgages are fixed rate, adjustable rate and balloon payment. Each has advantages and disadvantages.
Fixed Rate Mortgage
With a fixed rate mortgage, you have a set interest rate for the entire life of the loan. The interest rate that you pay for your loan won't change - which means that you'll pay the same monthly payment for the entire length of the loan. This protects you from unexpected rises in interest rates that would increase your monthly payment. At the same time, should the interest rates drop, you will have the option of refinancing at a lower interest rate. Because the protections are largely on the side of the buyer with a fixed rate mortgage, interest rates on them are generally slightly higher than they would be on other types of mortgages.
A fixed rate mortgage is the safest type. Because the payments are predictable, it’s usually considered the most desirable type of mortgage. Always choose a fixed rate mortgage if interest rates are rising.
Adjustable Rate Mortgage
When you choose an adjustable rate mortgage, your monthly payment and interest rate will fluctuate with the current market interest rate. If the interest rate goes up, so will your monthly payment. If it drops, your monthly loan payment will as well. The adjustable rate is tied to an index, which is determined by the lender. Other terms of the mortgage are also determined by the lender. These include how often the interest rate is adjusted - anywhere from every 3-6 months to once a year, how much the interest rate can increase or decrease on any adjustment date, and whether there is a 'cap' on how high the interest rate can rise.
Often, adjustable rate mortgages are advertised with extremely low interest rates, which will be in effect for a short period of time. When the introductory period is over, the mortgage rate will rise to its normal amount.
Choose an adjustable rate mortgage when you have secure income that is likely to increase along with the economy. It's a good mortgage when interest rates are stable, or if the signs suggest that they're about to fall.
Balloon Mortgages
A balloon mortgage is often a last resort for home buyers who can't qualify for more traditional loans. The balloon mortgage has a fixed interest rate and monthly payments for a specific amount of time. At the end of that time, the entire loan comes due - hence the name 'balloon'. In practical terms, a balloon rate will give you a fixed monthly payment for several months. After that, you'll essentially have an adjustable rate mortgage.
Choose a balloon mortgage loan for substantially lower initial rates, or if your credit limits the other types of mortgage that you can apply of qualify for.
Now that you understand your options for mortgage loans, don’t forget to shop around! The interest rates and fees can vary wildly from lender to lender, so make sure that you get the best deal that you can!
About the Author
Carrie Reeder is the owner of ABC Loan Guide, an informational website about various types of loans. The site has informative articles and the latest finance news.
Best Home Mortgage Interest Rates News
As Interest Rates Drop, Interest in Refinancing Jumps (WFMY News 2 Greensboro)
Mortgage consultants say a growing number of people want to take advantage of lower interest rates.
Read more...Mortgage interest rates hit 37-year low (WTHR Indianapolis)
Interest rates on 30-year home mortgages are at a 37-year low, and in a struggling economy it's news homeowners want to hear.
Read more...Record low interest rates on cards (Express and Star)
Fresh gloom was predicted for millions of pensioners and savers this week with interest rates set to hit a record low as the Bank of England grapples with a deepening recession. The Bank’s official rate has never fallen below the current two per cent in … [visit site to read more]
Read more...Mortgage rates near record-lows (KTIV Sioux City)
SIOUX CITY, Iowa (KTIV) Lately, for Mark Roos, days have been busier than normal. He's been getting several calls and e-mails daily from people interested in refinancing their home.
Read more...Foreclosures well below national average in East Texas (KTBS Shreveport)
Home foreclosures have hit all-time highs around the country -- but not in parts of East Texas. Gaylene Swanson with Texas Bank and Trust said the East Texas area is not experiencing the housing crisis like other areas. For people having a tough time paying their mortgage, Swanson is surprised more homeowners are not taking advantage of the low interest rates -- below 5 percent for those with ...
Read more...Now May Be Good Time To Refinance Home (KMBC-TV Kansas City)
There aren't many bright spots in this economic recession, but one might be the fact that mortgage rates are at near record lows.
Read more...You must be logged in to rate this story. (WBOC Salisbury)
SEAFORD , Del. - Mortgage rates are at a 37-year low and many homeowners are taking advantage of the dip in interest rates to refinance. Lenders say December was their best month in six months.
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