Your Mortgage Loan Choices

Are you getting ready to purchase your first home and take out a mortgage? It can be a complicated process, especially if you aren’t familiar with all of your choices. In today’s mortgage industry, there are more options than ever with varying types of mortgages available depending on your credit, down payment, and other factors. Each loan type offers different benefits, so it’s best to find the one that fits your specific needs. Here’s a look at the major options you’ll have for your mortgage and how they work. While these are the basic types of mortgages at your disposal, lenders are constantly making changes and innovations to get ahead of the competition, so don’t be surprised to find a few odd mortgage types out there.

Mortgage Types

• 1 Year Adjustable Rate Mortgage: Although its popularity may be waning due in part to the current mortgage crisis, the adjustable rate mortgage or ARM is often used by first-time home buyers. A one year adjustable rate mortgage features interest rates that change at least once a year. ARMs can put buyers at risk if they are unprepared for rate changes that can significantly increase their monthly payments.
• 30 Year Fixed Rate Mortgage: Long considered the traditional or standard mortgage, fixed rate mortgages remain some of the most popular today. You might not get the lowest interest rate from the outset, but the security of having a fixed rate is well worth the trade-off for most people. Of course, you could possibly take a 15-20 year fixed rate mortgage as well, but you’ll have much higher monthly payments.
• Hybrid Mortgage: Like the name suggests, hybrid mortgages are a mix of both fixed rate and adjustable rate mortgages. Typically, the first 3-5 years of a hybrid mortgage have a fixed rate, and then its rate becomes adjustable every year after. These types of mortgages can be beneficial if you expect to be earning more money in a couple years to accommodate the rate adjustment.
• Interest-Only Mortgage: Perhaps the riskiest type of all mortgage, interest-only loans allow the homebuyer to only pay interest on their mortgage for the first several years, after which they pay on the principal. What makes them so risky is that many people are not prepared to deal with the sky-rocketing monthly payments after the interest-only period ends. Interest-only mortgages are usually only recommended for people who plan on moving from their home or refinancing in a couple years.