When the homeowner, or future homeowner, approaches the lender and they begin the process of filling out the mortgage loan application, it is a very good idea to know what types of mortgages are available and the advantages and disadvantages for each of them.
- Fixed Rate Mortgages
A fixed-rate mortgage (FRM), often referred to as a “vanilla wafer” mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float”. The biggest advantage of having a fixed rate is that the homeowner knows exactly when the interest and principal payments will be for the length of the loan.
- Adjustable Rate Mortgages
A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. This type of loan is considered to be riskier because the payment can change significantly. However, obtaining a one-year adjustable rate mortgage can allow the customer to qualify for a loan amount that is higher and therefore acquire a more valuable home.
- 10/1 ARMs
A popular program for borrowers who plan to keep the loan less than ten years, the 10/1 ARM is a loan with a fixed rate and payment for the first ten years. The primary advantage of the 10/1 ARM is a lower initial rate and payment than available on a 30 year fixed rate mortgage.
- 2-Step Mortgages
A 2-Step Mortgages is an adjustable rate mortgage that offers an initial fixed-interest rate for a period of time (usually 5 or 7 years) after which, at a predetermined date, the interest rate adjusts according to current market rates.
- Balloon Mortgages
A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. Balloon payment mortgages are more common in commercial real estate than in residential real estate.