Home Mortgages
What’s Right for You?
When it comes to choosing a mortgage that’s right for you, the choices can be overwhelming. But don’t worry — you don’t have to choose from hundreds of different options to find your ideal option. There actually are only about six or seven basic types of home mortgages, each of which offers different benefits depending on your situation. You’ll want to base your decision on several key factors, including your current monthly income, your future expected income, current assets, and your liabilities or debts.
Before you solidify your mortgage choice, you’ll also want to weight the pros and cons of an adjustable-rate mortgage (one that changes) or a fixed-rate mortgage (one that stays the same). Once you decide on that, then you can move on to the basic mortgages that are offered:
Fixed-Rate Mortgage
- Oldest and most popular
- Rate is constant over the life of the loan
- Can be taken out in 10, 15, 20, or 30-year lengths
Adjustable-Rate Mortgage (ARM)
- Interest rate fluctuates
- Are tied to one-year Treasury bills or another specific index
- Initial rate is low, but grows each year
- Usually a cap of two points; lifetime ceiling caps of around six points
- Rate can drop
Two-Step Mortgage
- Usually called 5/25s and 7/23’s
- Convertible converts the loan to a fixed loan for the remaining 25 or 23 years
- Nonconvertible – converts the loan to an ARM
- Both are 30-year loans
- Fixed interest rates for the first 5 or 7 years; then change to convertible or nonconvertible loans
- Both can be amortized over 30 years
- Riskier than fixed rates, but less risky than ARMs
FHA Mortgage
- Pre-set spending limits
- Amounts are set by the median prices of different cities within a particular area
- Only 5% down is required (sometimes 3%)
- Steep mortgage insurance premium and other upfront costs are required
VA Loans
- Designed to help military vets buy homes with no down payment
- Not allowed to pay points; responsible for some fees
- Seller usually has to pay the extra money
Balloon Mortgages
- Can be any length
- Some can be principal and interest; others only interest
- Loan must be paid in full when it’s due: either amortized over 30 or 50 years and you pay the first 5 or 10 years before paying it off OR you only pay the interest until the loan is due
Shared-Appreciation Mortgages
- Lender offers you a below-market rate in exchange for a share of the profits when the home is sold
- You receive the tax benefits
- Lender doesn’t make money unless you do
- If home increases greatly in value, you’ll lose a lot of profit to the lender
- Most common among first-time homebuyers working with non-profit groups that help low to moderate income families
Biweekly Mortgage
- You pay half the amount of a monthly payment
- Paid 26X a year (not 12X monthly)
- Cuts down on the amount of interest over the life of the loan
- Paying so often can be a drawback
