| Buying a home is probably the biggest decision you | | | | fluctuations in the market. |
| will every make. But deciding to buy is only the first | | | | Drawbacks of FRMs are two-fold. If interest rates go |
| step in the decision making process. | | | | down, you are locked into a higher rate. And often |
| Now, you must decide what type of mortgage is | | | | FRMs carry higher loan costs, because they carry |
| best for you, and if you've never bought a home | | | | high risks for the lender. |
| before then the terms can be confusing. | | | | If a lender signs you to a 30 year FRM at 6 percent |
| Many factors must be considered when selecting the | | | | interest, and then interest rates continue to rise, the |
| right mortgage. Most importantly, borrowers must | | | | lender is locked into accepting 6 percent interest for |
| understand how the different types of mortgages | | | | the life of the loan. |
| are structured. | | | | Balloon mortgages operate quite differently, and are |
| The three most common types of mortgages are | | | | structured so that there will be a balance at the end |
| adjustable rate mortgages, fixed rate mortgages, and | | | | of the term - usually 5 or 10 years - that must be |
| balloon mortgages. | | | | repaid. |
| An adjustable rate mortgage (ARM) is structured so | | | | Some balloon loans only require that you pay the |
| that the interest rate is not locked down. | | | | interest during the loan term, which means monthly |
| Usually, the introductory rate is set for about 5 to 7 | | | | payments are often very low, but at the end of the |
| years, at which point it will be adjusted either up or | | | | loan the original balance will be due in full. |
| down, depending on the current interest rates. | | | | Another type of balloon loan calculates payments as |
| After the initial rate adjustment, ARMs are usually | | | | if the loan were to be paid in full over 30 years, |
| adjusted every two years for the remaining length | | | | which does reduce the balance at the end of the |
| of the loan. Interest rate adjustment is usually | | | | term. |
| capped at about 2 percent, meaning that the interest | | | | Still, this type of loan must be refinanced after the |
| rate cannot be adjusted more than that each time. | | | | loan term is up. Balloon loans can be beneficial if the |
| ARMs are also set with a maximum adjustment rate. | | | | borrower expects to resell the house at a profit |
| If the maximum adjustment rate is 7 percent, that | | | | before the ending balance comes due. |
| means that the highest rate the borrower ever pays | | | | The type of mortgage you select depends largely on |
| is 7 percent above the initial interest rate on the loan. | | | | your plans for the house. Are you planning to live in it |
| Fixed rate mortgages (FRM) are just that: fixed. The | | | | long term or short term? |
| interest rate will never be adjusted. | | | | Do you expect the property to appreciate rapidly? |
| These mortgages offer the lowest risk to the | | | | Keeping your long-term goals in mind will help you |
| borrower, because they protect from rising interest | | | | choose the mortgage that is right for your unique |
| rates. If the life of the loan is 30 years, then the | | | | situation. |
| borrower is protected for 3 decades from | | | | |