There are many different mortgage types and it is important to know the differences between the various options. Knowing the pros and cons of each mortgage type can potentially save you a lot of money. Here is an overview of some of the less common mortgages offered. Three of the different mortgage types are: flexible-payment option ARM, interest-only ARM, and the convertible ARM.

Flexible-Payment Option ARM (Adjustable-Rate Mortgages)

The flexible-payment option is different because the person who borrows can choose from a variety of payment options every month. There is a ?change cap,? which does limit how much the payments can vary each year. A major positive is that this method can easily lower your interest rate when needed. This option is ideal for people who having varying incomes, such as people who receive sales commission; it might be better for him/her if their payment is less during slow times in their field. A major problem is that some of the options offered will not cover the interest paid. Also, negative amortization can occur when lower payments lead to an increase in your monthly balance. These payments could increase tremendously. Sooner or later, you will have to pay off the principal and the payments will increase substantially. Do not choose this mortgage if you cannot afford the principal.

Interest-Only ARM

For a stretch of time, you will not pay the principal and only pay the interest. This mortgage is nice if you do not plan on staying in a house for a long period and allows you to afford something that might normally have been out of your price range. If the market is hot or you live in a premium neighborhood, you could have low payments while the house appreciates in value. There is always the option of paying money towards the principal while the payments are low; payments on the principal reduce your monthly payments. This type of mortgage is nice for people who are either on commission or have bonuses that are a good portion of their income that come in one lump sum. A problem is that in the long run you will have to pay back the principal; this could be a major problem if the market has gone down and the value of your house falls with it. A common strategy is to invest the money made off the interest-only loan and build it up towards the principal. Be cautious, because if you cannot afford the interest payment and the principal at the same time, then the house is probably out of your income range. Also, if your plan was to sell the house soon after taking out the loan and the house is not selling, this could also hurt you.

Convertible ARM

A convertible ARM is an ARM loan that can be converted to a fixed rate after a period of time. This type of loan can save you on refinances costs if you had planned on refinancing regardless. A con is that you will have a higher fixed rate with the convertible loan; you will also not be able to shop around for better deals. The convertible loan does save you on shopping around and refinancing, but you may end up paying more on the fixed loan than you would have with the refinanced rates.