Mortgage Options for Homeowners
A home mortgage is a type of loan used to buy a home where the home itself acts as collateral to secure the loan. The majority of home buyers take out mortgages, since few have enough money to pay for a home in full. Mortgage lenders charge interest on lent funds; the amount of interest paid can vary greatly depending on the type of mortgage a borrower chooses.
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Fixed-Rate Mortgages
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Fixed-rate mortgages are mortgages with a static or fixed interest rate that does not change over time. Fixed-rate mortgages are considered the safest type of mortgage since you know exactly how much interest you will pay over the life of the mortgage. The interest rates charged on fixed-rate mortgages vary according to the length of the mortgage: 30-year fixed-rate mortgages carry higher interest rates than 15-year mortgages.
Adjustable-Rate Mortgages
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Adjustable-rate mortgages or "ARMs" are mortgages where interest rates can change over time. The rates on adjustable-rate mortgages may roughly follow interest rates in the overall economy. According to Freddie Mac, ARMs usually start with lower interest rates than fixed-rate mortgages, but rates are likely to increase after initial periods of low interest.
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Second Mortgages
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Second mortgages are mortgages taken out by a current homeowner against equity they have build up in their home in order to access cash. For instance, if you have paid off your home in full, and the home is worth $100,000, a second mortgage would allow you to tap into some of the $100,000 of value to get cash. It is possible to take out a second mortgage before your first mortgage is paid off in full.
HELOCs
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A home equity line of credit, or HELOC, is a credit line that trades the equity in a home for cash. A HELOC can be thought of as a type of second mortgage, but instead of trading equity for cash in one large lump sum, you are able to trade equity for cash as needed in smaller increments. Both second mortgages and HELOCs reduce how much of your home you actually own and therefore should be used as a method of last resort to pay for necessary expenses.
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