Hello Everyone-

Today's post is about 'Types of Mortgages' - it's important to know which is which when you are purchasing or refinancing your Palm Beach Home.

We all hear about Fixed Rate vs. Adjustable Rate, Option ARM's, Interest-Only, Balloons - but do you know what they are?

Fixed Rate Mortgages- This is the one that people are most familiar with - very easy to understand.  Basically, whatever interest rate you start with, you keep for the life of the loan.  No changes, adjustments, etc.

Adjustable Rate Mortgages (or ARM's)- Becoming much more popular. These loans start with a particular rate that does NOT change for a  period of 2, 3, 5, 7 or even 10 years- after which the rate can increase.  When discussing this type of loan you will hear things like '2/2/6'.  That is short for:

• How much can the rate increase after the initial fixed period?
• How much can the rate increase each period (usually a year) after that?
• What is the cap on the TOTAL increase?

So in this case, after the fixed period is over, your start rate can go up by 2 - every year after that it can increase by another 2 and the total amount of all of the increases can never exceed 6.  For example, if your start rate was 6% it could increase to, but not exceed 12%.

Interest Only- Exactly what it sounds like.  Your monthly payment only covers the interest, it does not contribute to the loan balance.  The idea is to get the lowest monthly payment possible.  In an appreciating market the value of the Home goes up, so even if you never pay down the balance you are still getting equity.

Option ARMS- These require their own post - they can be quite involved and I will go over them tomorrow.

Balloon- Typically associated with lot loans.  Regular monthly payments are made until the term is up - then the entire remaining balance is due OR if you decide to build on the land before the term is up, you can roll the land loan into the home loan and avoid the Balloon payment.

So it comes down to Fixed vs Adjustable.  I suggest you check out this post from Jason Price of Knightlines Mortgage Services, LLC.

In the post he makes the case that the best mortgage IS a fixed rate mortgage - even if it's adjustable!

And he's 100% correct.

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