Different Types Of Mortgage Loans For Different Types Of Home Owners

Want to know what type of loan to get for your home purchase? If you are a first time home buyer or even a seasoned real estate investor with a preference for high end homes, knowing what the different types of loans are and the pros and cons will serve you well. This article highlights three of the different types of loans that a majority of home owners will consider. The types of loans are a fixed rate home loan, an adjustable rate mortgage or ARM for short, and a balloon mortgage. Each of these types of loans has advantages and disadvantages to be aware of.

The most common type of loan that home buyers consider is the fixed rate home loan. This loan typically offers the security - or peace of mind - of letting you know exactly what your monthly payments will be. For clarification, I am talking about the mortgage payment, this doesn't include insurance and taxes which typically make up a small portion of your monthly payment - these can and do change over time. The stable payment schedule is typically the biggest advantage of a fixed loan. If interest rates rise over time, the fixed rate borrower still pays the same amount and can be happy with the fact that they are paying a lower monthly amount than someone just starting out. The flip side is that if rates decrease, then they are paying more than someone just acquiring a fixed rate mortgage. Depending on your financial situation, it might be advantageous to refinance your mortgage if rates drop significantly and you plan on being in your current home for an extended period of time. If you are a borrower who doesn't expect to stay in the same home for very long, then an adjustable rate loan offers advantages.

An adjustable rate mortgage loan, also known as an ARM, has an interest rate that varies with the market. This rate is typically tied to the prime rate and depending on the conditions of the loan will have a minimum and maximum interest rate. Because you as the borrower are taking on more perceived risk, the rates on an adjustable loan tend to be lower than on a fixed rate mortgage. The obvious downside of this is that rates can and will vary. Higher interest rates will result in higher payments. Declining interest rates mean lower payments. If you think that interest rates are declining, then this type of loan might be for you. If you can accurately predict when interest rates have settled and found a bottom, then you can change your arm to a fixed loan and lock in the lowest rate possible. This assumes a lot, namely that you can predict where interest rates are going. This is something even the professionals have a difficult time with. Also, if you plan on living or owning a home for a short period of time or for investment purposes and plan on selling quickly, i.e. - flipping, then an ARM might suit your needs well. While an ARM has a flexible interest rate associated with this loan, the next type of loan, the balloon mortgage typically has an even lower interest rate.

On the surface, the balloon mortgage has the best of a fixed interest rate loan and an adjustable mortgage loan. A balloon mortgage typically has a fixed interest rate for a fixed amount of time, like a fixed interest rate loan, and a low interest rate similar to an ARM. The difference between these types of mortgage loan is that at the end of a fixed amount of time, you will owe the remainder of the unpaid balance. Again, this type of loan depends on your personal financial situation. For home owners who keep a home for a short amount of time - time less than when the final balloon payment is due, this type of mortgage might be the right type of loan. The obvious downside is that you do in fact owe a large amount of money at the end of the loan period



First Time Home Buyer