Mortgage Types: Whats Right for You?

By: Joe Pinto

This is an age-old question that people have been asking for about as long as there has been home financing. Although the practice of lending has evolved dramatically over the past years, the basics are still the same. Indeed some of the old standby loans are still offered and are usually the best option as well. This article will explore the most commonly used home loans and explore some of their merits and drawbacks.

Fixed Rate Mortgage - This is by far the most common and desirable mortgage. It is also one of the oldest types of home loan going. This is what most people are referring to when they speak of a mortgage. Fixed rate loans are usually amortized over a set period of time, 30 years for example. The fixed interest rate is what makes these loans popular. If you can find a fixed rate mortgage then you will always know what you loan payments will be for years to come. This is highly valuable in creating a realistic budget that you can stick to in the long run. This type of loan is so popular because of the wild fluctuations that home loan interest rates go through. Once the loan is signed then the interest rate is fixed for the term of the loan.

Adjustable Rate Mortgage - This kind of loan is based on the borrower taking a chance that interest rates will decrease. ARM's are notorious as many people bought into ARM's only to see their interest rates and monthly payments go through the roof along with their blood pressure. ARM's are unpredictable and chancy and are not recommended for most buyers. Usually these loans are negotiated when interest rates are low and don't show signs of inflating in the near future but that is a huge gamble as many have found out.

Balloon Mortgages - This is another tricky type of home loan. Essentially the practice of a balloon mortgage is to enable the home owner to pay only the interest for the first term of the loan, usually 5-10 years. At that point the home owner must either pay the entire amount of the loan off or refinance for the amount remaining. These kind of loans can work if you are only going to be in a home for a short time. However, long-term they are not a wise choice.

FHA & VA Loans - These are both Government insured loans. VA loans are available to Veterans only and FHA loans are Federal Housing Administration loans and a potential borrower must qualify for either. Keep in mind that only certain homes qualify for this kind of loan program as well.

Be sure to investigate your borrowing options carefully. The kind of loan that you choose will be a major defining factor in your financial future and as such it is a decision that should be made from an educated perspective.

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