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Mortgages - What Are The Different Types
By Michael Russell

If you are thinking of purchasing a home or refinancing your existing home, you will need a mortgage. There are many different mortgage plans to choose from, each with their own advantages and disadvantages. Understanding the difference between them will help you make the right decision.

Fixed rate mortgages. Fixed rate mortgages are just that. The interest rate you pay on the mortgage stays constant for the life of the loan. Fixed rate mortgages are usually longer duration mortgages, such as 15, 20 or 30 years. When you apply for a fixed rate mortgage, the interest rate is locked in for you and will stay the same, no matter what the prevailing interest rate is. The benefit to this is that you always know what your monthly payment will be for the life of the loan. The disadvantage is if the current interest rate becomes lower than your locked in rate - you end up paying more than someone obtaining a new fixed rate mortgage. However, you can always refinance if that is the case. This type of mortgage is best suited for someone who will be occupying the property for more than 5 years.

ARM or Adjustable Rate Mortgages. ARMs have a fixed interest rate for a set amount of time, normally a short duration such as 3 to 5 years. The interest rate for this initial period is less than the current interest rates for fixed rate loans. At the end of the initial period, the interest rate will then be recalculated according to what the prevailing bank interest rate is. Then, the rate will be adjusted periodically according to your bank's contract with you. (It could be every 3 months, or yearly.) The advantage to the ARM is that it offers you a lower payment in the initial years and you can then refinance to a fixed rate mortgage after your ARM is up if you like. The disadvantage is that interest rates could skyrocket during your ARM and you would have to take a much higher rate than if you had gotten a fixed rate initially. The ARM is best suited for someone who is going to stay in their home for less than 5 years.

Interest Only (IO) mortgages. IO mortgages are not new on the market, but they are being offered to more and more people. When you take on an IO, you are only paying the interest that accumulates on your mortgage each month. The principle does not decrease. This payment scheduled is fixed and at the end of the interest only payment period, you must begin making payments on the principle as well, resulting in a much higher monthly payment. The advantage to this is a lower payment for several years. The disadvantage is that your payments will increase sharply after your IO period is up. The type of mortgage is best suited for those who are expecting to earn much more money in a few years, or someone who has an irregular commission based income.

Balloon mortgages. Balloon mortgages are similar to fixed rate mortgages in that the monthly payment and interest rate are fixed for a period of time. However, at the end of the fixed period (usually 3, 5 or 7 years), the rest of the mortgage is due in one lump sum. Balloon mortgages are usually offered to those that cannot qualify for other types of loans. Some balloon mortgages do allow you to convert to a full fixed rate mortgage after the initial period, if you can then be qualified for it.

There is bound to be some type of mortgage that will fit you best. Speak to a loan officer and go over all the options. Make your decision based on the length of time you will be in the home and how much of a monthly payment you can feasibly make.

Michael Russell
Your Independent Mortgage guide.
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