The fixed-rate mortgage has long been the most popular home financing product. With an interest rate that never changes, it provides stable, predictable monthly payments throughout the life of the loan. Your monthly payments won't decrease if market rates go down, but you'll have the comfort of knowing you are protected if rates go up. If you plan to stay in your home for more than seven years, and prefer the security of stable payments to being at the mercy of the market, a fixed-rate mortgage may be the right option for you.
Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage has a low starting rate, so your initial monthly payments on an ARM will be lower than on a fixed-rate loan for the same amount. And because the amount you can borrow is based partly on how much you can pay each month, your maximum loan amount will probably be higher with an ARM. Here's how it works:
- The interest rate starts out lower than the rate on a fixed-rate mortgage, then adjusts regularly based on market indicators.
- The starting rate stays fixed for between three months and 10 years, depending on the ARM product.
- Most ARMs adjust annually, but some adjust on a semi-annual or monthly basis.
- Individual adjustments are capped at a certain amount, and the rate can never exceed the lifetime cap.
Keep in mind that the interest rate and monthly payments can increase during the loan term. You may get the most value from an ARM if you plan to move before the end of the fixed-rate period, or if you're buying at a time when rates are relatively high.
A balloon mortgage has a lower rate and lower monthly payments than a fixed-rate mortgage. Like an ARM, a balloon loan can help you either save money each month or borrow more for your home purchase. Monthly payments on a balloon loan are fixed for the five- or seven-year loan term. A final "balloon" payment for the entire remaining balance is due at the end of the term. A balloon mortgage is a good option if you:
Put the greater benefits of an FHA-Insured Loan to work for you.
- Only plan to stay in your home for five to seven years
- Don't expect rates to rise significantly before the loan matures
- Expect to have the money to make the final payment at the balloon date
- Want predictable monthly payments
The Federal Housing Administration is the largest insurer of mortgages in the world. The FHA makes home financing possible for people who might not qualify for conventional mortgage programs to purchase a home or refinance their current mortgages, including Adjustable Rate Mortgages. Now you, too, may be able to benefit for an FHA loan. Here's how:
Get the military-service benefits you're entitled to with a VA loan
- Learn if you can trade your Adjustable Rate Mortgage for a FHA-insured fixed-rate loan
- Discover if you are eligible to purchase a home with an FHA mortgage
VA mortgages are insured by the Department of Veterans Affairs and are available to military service veterans, reservists and active-duty service members. These loans make home financing easier and more affordable by offering some of the most generous approval requirements of any mortgage program. No down payment is an option on many VA loans.
Instead of paying principal and interest on your mortgage every month, an interest-only loan lets you defer principal payments during a specified period early in the loan term. That means your monthly payments will be lower during the interest-only period.
* Key benefits:
Risks you should consider:
- More borrowing power. Lower payments may help you qualify for a larger loan.
- Flexibility. You can make principal payments when you want to build equity, or choose to put money into other investments instead.
- Higher financing cost overall. The loan amount on which you pay interest won't decrease until you begin paying down the principal.
- Negative equity. Even without principal payments, you can still build equity if the value of your home increases. If the value decreases, however, you could owe more than your home is worth, which is problematic if you intend to sell. So do the benefits of interest-only loans outweigh the risks? It all depends on your financial situation and how you want to manage the investment in your home. Individual needs vary, so you should discuss your options with your financial advisor.