In the past, real estate had more flexible options. Some lending agencies offered amazingly cost-efficient schemes, in an effort to land a deal. However, with the state of the market at present, would-be homeowners have but three options to choose from. If you are planning to purchase or refinance a home, there are three types of mortgage schemes that you can use.
Fixed Rate Mortgages
Just like its name, fixed rate mortgages have a set or fixed interest rate that is created on or before the loan is made. This amount will remain constant throughout the agreed payment period. Therefore, if you pay a fixed rate mortgage for $ 100 and agree on a 30 year period of payment, you will pay that set amount in the agreed-upon duration, regardless of monetary inflation or deflation. This is helpful as you will be fully aware of the amount and there is no reason to worry about an increase in payment. This lowers your risk of paying more in the next few years. However, keep in mind that the lender may choose to demand a higher interest rate as the company may worry about the mentioned deflation of currency.
Adjustable Rate Mortgage
The ARM is a type of mortgage wherein the buyer is provided with a set amount of initial monthly payment or interest for a shorter time span. Therefore, it may last from three months to five years. After this period, the company or bank may decide to change the interest rate or amount, depending on the current market rates. The lender may use a standard index as well. Please not that this may not be in the advantage of the buyer.
However, this type should be considered as there is a big possibility that the next period of adjustment may lessen the amount payable. This type of mortgage usually carries a low interest rate, in comparison to the fixed rate type. Some lending agencies may also have a cap or maximum limit. For example, if your current rate was 5% and the cap mentioned is 10%, even if the interest rates were to rise to 20%, you would only have to pay 10% at most.
The balloon mortgage features a fixed monthly payment and interest rate. However, after a set time span, the full balance must be paid. With the state of the economy, a homeowner will rarely have the cash on hand to pay for the total sum, especially if it is due in 5 or six years. This will force the individual to take out a brand new mortgage to cover the sum. If his or her credit does not permit a new loan, the house may be lost. Please note that this type of mortgage should be considered as the final resort.
Of the three mentioned types, it would be best to consider the fixed rate and adjustable rate mortgage However, if a person were to prefer a balloon mortgage, he or she should save diligently, in anticipation of the final due date.
Roger is a freelance writer that loves to share tips on parenting and frugal living in general. You can have a look at his financial site where he covers topic such as ppi claims.