The most common type of home loan is the 30-year fixed-rate mortgage. The borrower locks in a fixed interest rate and a fixed payment amount for the 30-year life of the loan. This protects against rising interest rates, and predictable payments make financial planning easier. It is an ideal arrangement for many people, but others may want to consider the benefits provided by available alternatives.
The two basic types of mortgages are fixed-rate and adjustable-rate mortgages. Most other types are variations of these two. Different lenders sometimes offer loans with unique terms, so it is important to know the details of a specific loan before applying. The following is an overview of the types of features you are likely to encounter when considering mortgage options.
Other Types of Fixed-Rate Mortgages
Some lenders offer fixed-rate mortgages with terms as short as 15 years or as long as 50 years. A loan with a shorter term comes with higher monthly payments, but it is a good option if you can afford it. You will own your home much sooner, and you will end up paying much less in interest. A longer term means lower payments, but you will spend significantly more on interest.
Adjustable Rate Mortgage (ARM)
This type of mortgage usually starts with a lower interest rate than you would receive with a fixed-rate mortgage. This can make it a good choice when interest rates are high. The rate will change, however, at set intervals and according to a particular index. Because lenders often start these types of loans at low introductory rates, the rate will usually rise at first. It may rise and fall over the life of the loan, and minimum monthly payment amounts will fluctuate accordingly.
This type of loan offers less predictability, but it is a good choice in some cases. If you are buying a home and expect your income to increase in the future, this type of mortgage may fit your financial situation. This is also a popular choice for people planning to sell or refinance before the rate adjusts.
Variations of Fixed-Rate and Adjustable-Rate Mortgages
There are a number of variations of these two types of mortgage. Some loans combine the two types, beginning with adjustable rates but allowing borrowers to lock in fixed rates later. Others may offer interest-only payments for a specified time or a relatively short term ending in a balloon payment. Each of these offers a unique alternative to the traditional 30-year fixed-rate mortgage.
