What are the different kinds of home loans or mortgages? A fixed-rate mortgage has an interest rate that remains the same for the length of the loan. If you are planning on remaining in your home for a long time, a 30-year-fixed rate, for example, may be a good choice for you as your payments will not vary much. If you opt for a shorter repayment period however, say, 10 or 20 years, the interest rate on your fixed-rate loan will be a little lower. An adjustable-rate mortgage (ARM) differs from the fixed-rate mortgage in that the interest rate it offers depends on the current market rates and overall trends in the economy. A starting interest rate for an ARM may be one or two percent lower than the interest rate offered in a fixed-rate mortgage but market fluctuations could cause it to go higher than the fixed rate after a period of some years. The terms of your mortgage may contain a clause that limits the increase of your interest rate to a pre-determined level. This is known as "capping" your interest rate. Here, the limit is often set at an annual increase in the interest rate. A balloon mortgage is a variation of the fixed-rate mortgage in which, when you reach the end of a pre-determined payment period, you must pay the outstanding balance of the loan. This amount is often called the "balloon payment". This is an option worth considering if you are planning to sell your property and to refinance again. When choosing whether to choose an ARM or a fixed rate mortgage, people will have their own reasons for either, depending on their circumtances. It may come down finally to your own personality - just how risk averse are you? Some people must have certainty and may feel stressed at the thought of not knowing what their mortgage payment may be in the future. Is the money they might save worth the personal cost of experiencing that stress? Perhaps not. So, some may choose to build their own comfort level into how they borrow for their home. ARMs are usually two, three or five years, although their duration can be for a shorter or longer time than this. At the end of that period your interest rate will become variable (floating) unless you sell your home or refinance. If you consider that there's a good chance you will sell or refinance within the period of the ARM, then you will be attracted by the lower interest rates that an ARM loan offers you. If you think it is unlikely that you will sell or refinance within that period, then you may do better to consider a fixed rate mortgage. You can do a web search to find one of the many websites that offer mortgage calculators so you can determine your mortgage repayments. You can then review the different payment schedules based on the interest rates quoted for both fixed-rate and ARM loans. This will enable you to decide which type of loan makes the most sense for you, given your own circumstances and financial situation at the time. Home equity loans and lines of credit can be useful tools for homeowners. These loans use the value of the house itself as collateral and they generally have favorable interest rates with the added bonus of tax deductible interest. That interest is often variable, however, varying up or down with market fluctuations. Such loans allow the homeowner to borrow money against the value of the home for all kinds of purposes college education, home improvement, vacations, and so on. A home equity loan represents a fixed amount of money that you would borrow for a fixed period. To consolidate a home equity loan and a primary or first mortgage, your home would have to be refinanced with a new mortgage that you would need to take out for the combined amounts of both loans. Since costs are associated with this process you, as a homeowner, should carefully consider the impact of these costs before seeking a home equity loan. |
