Description: A fixed-rate mortgage comprises a mortgage with interest that iis fixed for a specified amount of time; i.e., 10 years, 15 years, 20 years, 30 years, etc., after that period is over you owe the amortized principal in full.
Pros: No surprises. You know your rate when you sign is the rate throughout the term of the loan. You can also refinance the loan at any time without penalty.
Cons: You're subject to the market. What does that mean? Well, while your rate stays the same, the market may not. Rates go up and down. If you take out a mortgage when lending rates are high, 5 years from now you may be stuck paying more than you would have had you waited. However, you still have the ability to refinance which allows you to "lock-in" a lower rate, but you need to be on the lookout for added "points" and costs that can quickly add up.
Beware:This is an ideal loan for a long-term homeowner. If you're going to stay in your house for less than 10 years, then you may want to look into ARM's as fixed-rate loans are geared more towards long-term buyers.
Description: The interest rate in an adjustable rate mortgage fluctuates with the market index on a predetermined interval. Meaning, your loan agreement will specify your current rate (which is current to the market) and the specific times that the rate will readjust to market; giving you a new "market" rate with the possibility of a minimum and maximum rate cap limit.
Pros: Rates are lower than fixed, and if you're a "house flipper" or someoen that plans on moving up in a few years, an adjustable rate mortgage might be the right choice. In addition to the lower APR, you may also qualify for a higher loan amount than you would with a fixed rate mortgage.
Cons: It's a gamble, plain and simple. You're betting that with the lower rate (lower than a fixed-rate loan, anyway) the property will appreciate and when you sell, you won't lose money. The downside is, you're at the mercy of the market and rates, almost always, rise.
Description: The adjustable rate on a 1 year Treasury ARM is fixed for one year, then changes to a true adjustable mortgage the following year and every year thereafter. The adjustable rate is determined by the treasury average index PLUS the loan margin (2%+ avg.).
Pros: Treasury ARM's usually have lower rates than fixed mortgages and when rates go down (which is the case the last few years), those holding a Treasury ARM will benefit from the lower rate.
Cons: The loan margin is key here. That extra 2% or so (depends on your individual loan margin at signing) will be added to the current rate - creating the rate you pay. When rates go up, like in 2004 - 2006 you could be paying quite a bit more than a fixed-rate mortgage with the added risk of not knowing what you'll pay each year.
Beware: Let's look at the reality of this loan. In a down market with low rates, such as the current state, you're more likely to benefit from the lower rate loan as opposed to a fixed-rate loan. Great if you're a short-term owner, speculator, or house flipper, but very poor for a long-term investment option as the loan is subject to market rates.
Description: An intermediate (or hybrid) ARM has a fixed rate for a specified time period then adjusts on a schedule. The adjusted rate is calculated by using an economic index plus the loan margin to determine the current rate of the loan once it switches to adjustable after the fixed schedule is up.
Pros: Easier qualification requirements in a low rate market (like this one) and cheaper than a fixed-rate.
Cons: As usual with ARM's, when rates are low they're preferred, but when rates go up you're at the subject of the market.
Beware: Low rates at the beginning of the loan and then a variable rate for the remainder of the term is a pretty risky proposition for most home buyers. If you're a "buy and hold" long-term investor - you'll likely want to look at fixed-rate loans.
Description: Just like the name suggests, an "Interest-Only ARM" is simply that, interest-only for a specified period of time. After this period of time the loan converts into an adjustable rate mortgage and is subject to current market interest rates.
Pros: An Interest-Only ARM gives you the opportunity to qualify for loans that ordinarily would have been a bit out of your price range. In addition to that feature, your interest-only payment will be much smaller than traditional fixed-rates and even certain ARM's.
Cons: Ever heard of a loan being "under water"? This is what happens when the value of your home drops and the principal (the total amount you owe -interest) is higher than the value of the property. Factor in higher interest rates and it's a recipe for trouble!
Beware: If you're considering an interest-only loan, be sure you can actually afford the interest-only payments. If they seem to be just in your budget, you probably can't afford the mortgage. Why? Because once that interest-only option drops and you have to pay down the principal as well, you're looking at a substantially higher mortgage payment.
Description: An adjustable rate mortgage that "converts" to a fixed rate mortgage after a specified amount of time.
Pros: If you're interested in refinancing a convertible ARM could save you money over a fixed-rate mortgage.
Cons: Higher rates!
Beware: It's a common belief that it's smarter to refiance than go for a convertible ARM. Weigh your options before deciding.
Description: In most states a loan amount of $417,000 or greater is referred to as a "Jumbo Loan". The federal agencies Fannie Mae and Freddie Mac purchase the bulk of these loans, which helps alleviate a bit of the risk that lenders take in offering loans on expensive, often hard to sell houses.
Pros: Need a $2,000,000 house in an expensive area? That's what a Jumbo Loan allows you to do.
Cons: Higher interest rates (thanks to the above mentioned lender risk).
Beware: You're probably already aware a high-priced property will likely also have high-priced monthly mortgage payments. If you don't want to pay all cash, or only finance a small amount of a property - the Jumbo Loan may be your best option.
Description: Interest rate is fixed for a period of time, but the principal is not completely amortized. For the remainder of the term, it adjusts to a new fixed rate determined by the Fannie Mae net yield index plus the margin. 30-yr. term
Pros: Lower monthly payments initially. If your career (and salary) has a good future, or you are in a hot market and plan to sell before the balloon comes due, you can save moolah.
Cons: Who knows what that new rate will be? There's a looming debt in your future.
Beware: You can refinance when the balloon comes due, but you are gambling that you can afford the refi loan.
Description: A fixed rate mortgage with an partially amortized principal (the amount of the loan) for a fixed period. At the end of the loan agreement the entire amount is due, much like a lease payoff, and this is called a balloon payment because of the size in comparison to the previous payments.
Pros: Refinancing or selling during the lower interest payments, i.e. before the balloon payment at the end, is the angle many borrowers use with this type of loan.
Cons: You do know you'll owe the WHOLE loan amount in one payment, right?
Beware: It almost goes without saying. If you can't unload or refinance the mortgage before the balloon, you better have some serious cash saved up! This is not a loan recommended for subprime borrowers, "buyers markets", down selling markets or borrowers with the inability to repay.
Description: The VA guarantees these no money down "veteran-only" loans.
Pros: Zero down, no need for PMI (like you'd have on an 80/20).
Cons: Could be a higher interest rate.
Beware: If you're a veteran and you qualify, make sure you compare rates given to traditional loans as you'll want to see a discount.
Description: A Government guaranteed loan with low down payment and no closing fees.
Pros: This is commonly referred to as a "first time buyers" loan, because it's primarily aimed at young families with a lower income that can't quite afford traditional mortgages.
Cons: Traditional loans tend to have better interest rates, due to the higher down payment.
Don't forget to insure your home. We've included a link to a great home insurance resource to help you not only save money, but protect your property and valuables. - Home Insurance Rates