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Step 1
Fixed rate mortgages (FRM) offer fixed interest rates for the duration of the loan. The duration normally ranges between 15-40 years.
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Step 2
Adjustable rate mortgage: Adjustable rate mortgage (ARM) offers a fixed interest rate and a fixed monthly payment at the beginning though these do not remain fixed during the whole term of the loan. The interest rates are adjusted periodically as per an index which reflects the present market standard. These indices and formulas are decided by the lender including the adjustment periods.
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Step 3
Interest-only mortgage: This is nothing but an option that comes attached with any type of mortgage, whether it is fixed rate mortgage or adjustable rate mortgage. A borrower need not pay principle for a specified duration of the loan. This duration can be from 3 to 10 years and is stipulated in the mortgage contract. The payment consists of only interest. During this period, the loan balance does not change.
Interest only options are ideal for those borrowers who have fluctuating incomes for e.g. consultants, businessmen and free lancers. Also, those borrowers who are buying house for the first time and are young with very little credit history. -
Step 4
Balloon mortgage: Balloon mortgage plans are similar to fixed interest plans wherein a fixed interest rate is charged and the monthly payment is also fixed. But after a specified time period which is decided at the beginning of the term, the whole balance of the mortgage has to be paid in one go. If the borrower is unable to pay, then either the house is sold off by the lender or the loan is readjusted.
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Step 5
Thus, with these mortgage options, one can buy a dream house. But, before availing any of the mortgage schemes, it is pertinent to go through the fine print and compare all the characteristics of each type of mortgage and then choose the one which fits in your scheme of things.
Comments
530shasta said
on 2/23/2009 Great article. Very informative.