When it comes time to secure a home loan, you will be overwhelmed with so many choices. However, the three primary options include an Adjustable Rate Mortgage (ARM), a Fixed Rate Mortgage (FRM), and a Balloon loan. The key with any loan is to make sure you lock into a good interest rate and that you end up with a monthly payment you can afford.
With your new home being a huge decision, it is important to take appropriate steps to ensure everything falls into place. For this reason, we wanted to provide you a summary of the three most common types of mortgage loans to help you along.
Adjustable Rate Mortgage (ARM)
With an ARM, you will typically enjoy lower interest rates, low monthly payments during the initial years of the loan, and in some cases, disclosures might be available for review. Many people turn to an FRM, which has definite advantages but keep in mind for many people, an ARM is the right solution.
With this option you would pay an initial interest rate, which would be lower than what you could lock into with an FRM. However, the degree of this reduction depends on the terms of the loan. When considering an Adjustable Rate Mortgage, two main things should be considered. First, the interest rate will vary short term. Second, if you have the possibility of earning more money, this is a great choice.
Fixed Rate Mortgage (FRM)
For this type of loan, you have a number of possibilities. As an example, you could go with a 30-year term in which you would enjoy options for low down payment, low monthly mortgage payment, and the fact that the principal and interest rate on the loan would not change. Then, for a 15-year FRM, you would have a great opportunity to build equity into your home very quickly. Additional benefits include significant savings on interest, and lower interest rates than you would get with a 30-year FRM loan.
Balloon Loan
Finally, this type of loan is setup so that your final payment is larger than all the other payments you have paid over the life of the loan. For instance, if you purchased a home for $170,000 and you take out a mortgage for $125,000 with 8% interest and a seven-year balloon, your monthly payment would be determined as if you had secured the loan over a normal 20-year period. Therefore, you would have a mortgage payment each month of $1,045.56 but only for the first seven years. At the end of the time, the loan would be paid off in full. However, if you were unable to do so, you would need to refinance the loan’s balance.