Just as homes come in different styles and price ranges, so do how you can finance them. While it may be easy to tell if you prefer a wanderer to a split-level or a craftsman to a colonial, figuring out what kind of mortgage works best for you requires a little more research. There are many different loan types to choose from, and a great lender can walk you through all of your options, but you can start by understanding these three main categories.
FIXED-RATE MORTGAGE
Fixed-rate mortgages are the most popular option. Set interest rates mean predictable monthly payments. These payments are spread over a term's length, which ranges from 15 to 30 years, typically. Currently, shorter loan terms are becoming more popular. In 2011, USA Today noted that 34 percent of refinancers shortened from a 30-year to a 20-year or 15-year loan. Generally, the shorter your loan's term, the lower the interest rate. Lenders take on less risk with a shorter loan term. This means you'll pay much less interest over the life of a 15-year mortgage versus a 30-year mortgage.
ADJUSTABLE-RATE MORTGAGE
As you might guess, the interest rate on an adjustable-rate mortgage fluctuates. Exactly how the interest rate changes depend primarily on the type of loan you get. In many areas of the world, including Britain and Australia, adjustable-rate mortgages are the norm. However, they're much less common in the U.S. If interest rates are going down, ARMs let homeowners take advantage of that without refinancing. If interest rates rise, however, ARMs can result in surprisingly sky-high payments.
BALLOON MORTGAGE
Balloon mortgages typically have a short term, often around ten years. For most of the mortgage term, a balloon mortgage has a meager payment, sometimes interest only. But at the end of the period, the full balance is due immediately. This can be a risky proposition for most borrowers.
INTEREST ONLY MORTGAGE
Interest-only mortgages give borrowers an option to pay a much lower monthly payment for a specific time, after which they'll need to begin paying principal. Balloon mortgages are technically a type of interest-only mortgage. But most interest-only options don't require a lump sum payment of principal. Instead, these payments will allow the borrower to pay only interest for a set amount of time. After that, the borrower will need to make up for the lost time by producing more principal than they would have had they begun with a traditional fixed-rate mortgage. In the long term, interest-only mortgages are more expensive. But they can be a decent option for first-time homebuyers or individuals who are starting businesses or careers with only a little money at first.
REVERSE MORTGAGE
This type of mortgage is for seniors only. A reverse mortgage gives homeowners access to their home's equity in a loan that can be withdrawn in a lump sum, with fixed monthly payments, or as a revolving line of credit. Homeowners don't have to make payments, but the lender will have a lien on the home for the amount owed upon the borrower's death.
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