Anna Fleet

08/13/2007

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Understanding your Mortgage Options

An Overview of the Various Mortgage Loan Types.

As a first time homebuyer you should know a thing or two about the mortgages available to you. What, you thought that there was only one type of mortgage out there?

Familiarizing yourself with the different types of mortgages on the market can help you save a lot of money. Why you ask? Because mortgages differ according to mortgage options, many of which can be adjusted and re-adjusted to suit your individual financial preferences. To get a handle on mortgage speak, please read The Ultimate Guide to Mortgage Speak.

Let’s start by giving you an overview of the different mortgages available to you:

• Fixed Rate Mortgages – or FRM’s as they’re often called, refers to a loan where the interest rate doesn’t change throughout the entire term (length of the mortgage). This means that the borrower will pay the same rate of interest throughout the lifetime of the mortgage – it will never change, even if the rates increase during the life of your mortgage. Fixed rate mortgages are likely the most popular type of mortgage. They make up seventy-five percent of the mortgage loan market. Even though a fixed interest rate is a plus if you get your mortgage when the rates are low; it can be a poor mortgage to have if the interest rates dip more during the lifetime of your mortgage.
  
  
• Adjustable Rate Mortgages – or ARM’s, are the opposite of fixed rate mortgages. The interest rates will remain the same for the first 10-years of the loan, but with an adjustable rate mortgage after 10-years the interest rate will vary whenever the bank rate changes. This can be good or bad – if the market is good and the bank rate low you could pay a lot less than a fixed rate mortgage. However bank rates are pretty unpredictable and lenders charge up to 2% higher than the bank rate, so you could end up paying a lot more over the long run. Plus your interest rates are never the same, so your mortgage payments can vary from month to month. Seventy-five percent of mortgage borrowers prefer the stability of a fixed rate mortgage.
  
  
• Flexible Adjustable Rate Mortgage – is similar to a plain old adjustable rate mortgage; however where it differs is with the interest rates. Yes, the interest rates vary month to month just like with an ARM, but there aren’t any adjustment caps placed on a flexible adjustable rate mortgage. This means the payments start off relatively low, and rise dramatically as the mortgage ages. A flexible rate mortgage is great for homebuyers who make little money early on, but will make much more later on.
  
  
• Biweekly Mortgage – This fixed rate mortgage has the borrower making payments twice a month (every 2 weeks) rather then just once per month. A biweekly mortgage is the way to go if you want to pay off the term of your mortgage quickly and save money on interest payments.
  
  
• Weekly Mortgage – This is another type of fixed rate mortgage that has the borrower making weekly payments, instead of just monthly payments. Again, it will help pay off the mortgage faster, and save you a lot of money in interest payments on your loan.
  
  
• Bimonthly Mortgages – Similar to a biweekly mortgage, actually these names are interchangeable at many banking institutions. Mortgage payments are made twice every month to reduce the term of a lengthier 30-year fixed rate mortgage.
  
  
• Balloon Mortgage - This 30 year mortgage is very similar to a fixed rate mortgage – with one large difference. Balloon mortgages require a large lump sum payment at the end of 5, 7 or 10 years – depending on the borrower’s agreement. Balloon mortgages are great for those who make little early on, but expect a bonus or retirement monies to kick in during this timeframe. That way they can invest the money in some sort of short term, high interest investment and use it towards their balloon payment to clear off the large balance of payment. There’s just one catch, if the borrower can’t make the balloon payment at 5, 7 or 10 years into their mortgage, the mortgage will revert back into a traditional fixed rate mortgage. However keep in mind that a penalty for missing your balloon payment and transferring to a fixed rate mortgage may apply.
  
  
• Interest-Only Mortgage Loan – This loan is unique in that the interest on the loan is paid upfront, before actual payments on the balance kick in. This means for the first few years of your loan you will only be paying the interest and not on the principal of your loan.
  
  

Which Mortgage is best for you?

So now that we’ve explored the various mortgage options available to you – how do you choose the mortgage that best suits your financial needs? Let’s explore the pros of each mortgage type using this handy little chart: