More than Just a Basic Loan: Identifying Five Different Types of Mortgages
By Angela Sanders Wednesday, January 15, 2014, 11:57 PM EST
It may seem as if the real estate market has dwindled down in recent years, especially after the financial crisis of 2008 and corresponding financial breakdown and economic recession. However, studies have actually shown that many people are now interested in purchasing a new home for their family. Since there are more than 2.5 million homes that are currently on the market right now within the United States alone, prospective buyers have plenty of options from which they can choose. When it comes to financing, though, you need to clearly understand the different types of mortgages available.
Fixed Rate, 30-Year Mortgage
The most favorable option when it comes to finding the perfect mortgage for your home is a fixed rate, 30-year loan. While it is true that the interest rate is much higher initially with this traditional type than others, many consumers are satisfied by it simply because of their interest rate and monthly payments will not change for the entire life of the loan.
If you want to pay off this fixed rate in a fraction of the time (such as 20 years instead of 30), the monthly payments will be considerably higher, but you will be able to build equity at an accelerated pace, according to Yahoo Finance. You can also use a mortgage refinance calculator at any point during the life of this loan to check for a more competitive deal.
Adjustable Rate Mortgage
Even though the adjustable rate mortgage (ARM) has the same 30-year term as the traditional fixed rate alternative, the interest rate doesn’t remain the same throughout the life of the loan. You will actually be required to pay an interest rate that changes every single year, which is determined and calculated the index to which the loan is connected. A specific margin is added to the determined index each year by the actual lender, which is how the interest rate is calculated.
Reviewing the terms and conditions of the mortgage agreement for an ARM plan is essential in order to fully understand the life-of-loan and annual caps and other important elements that are factored into this particular type of loan as well. You may also want to consider the fluctuating interest rates if you decide to use a mortgage refinance calculator or tool at any point in the future to search for a better deal.
If you are interested in basically straddling the fence between fixed rate and ARM loans, a hybrid mortgage is the best option to consider. For instance, if you decided to go with a 3/27 hybrid mortgage, the rate will remain fixed for three years before converting to a one-year ARM for the rest of the mortgage term. On the other hand, another popular setup is the 5/25 hybrid that allows you to enjoy a fixed rate for five years before dealing with a converted one-year ARM for the remaining 25 years. Most consumers decide to go with these plans in order to save money if they know that they will not be staying in the same home for more than a few years, according to Bank Rate.
For the first five years with an interest-only mortgage, you will be able to make payments on the interest only. Once that time period has elapsed, you will be able to repay the principal and any additional interest in order to pay off the full loan on time. If you know that you are either going to be selling your home or applying for a refinancing within the first five years, this would be the most advantageous route to take when selecting your mortgage type.
There are some homeowners who want to pay down their mortgages as soon as possible and are willing to make two or even three payments each month in order to do so. In these cases, the payment-option loans are the best solutions because they allow you to basically set everything up to pay a 30-year loan within a 15-year time period. Doing so may also prevent you from having to use a mortgage refinance calculator at all, since you will be able to pay off your full mortgage in a relatively short period of time.