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How it works |
Advantages |
Disadvantages |
When to consider |
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Fixed Rate Mortgage
Borrower and lender agree upon an interest rate, corresponding principal and interest payment. It remains constant throughout the life of the loan.
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- Stable & Predictable
- Makes budgeting for the future easy
- Protects from rising interest rates
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- Interest rates are higher than initial interest for other types of loans
- Doesn't benefit you when interest rate fall |
- You prefer not to take risks
- You plan to stay in your home for more than 5 to 7 years |
Adjustable Rate Mortgage (ARM)
Borrower and lender agree on an initial interest rate that will change periodically, usually in relation to a specific index. Payments rise and fall accordingly.
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- Interest rates are lower than fixed-rate mortgages at the begining of the loan
- If interest rates falls, your payments goes down |
- Rise and fall of interest rate
- Future payments are unpredictable |
- Interest rate are high
- You plan to keep your home for a short period
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Balloon Mortgage
Starts out as a fixed-rate mortgage but has a shorter mortgage term, usually 5 - 7 years, and requires borrower to pay off the balance at the end of the term. |
- Interest rate and monthly payments are lower
- Predictable payments for term of the loan |
- Can require financing at rates available at the end of the loan term, if chooses to keep the home
- Unpredictable situation after the loan ends. |
- Plan to keep your home for a short period |
Government Loans
Through various lenders, the Federal Housing Administration (FHA) and the Veterans Administration offers opportunities for many americans |
- Allows for a lower down payment than a traditional bank
- Insured by the government
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- Limited properties disignated as approved for government loans
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- If you are a veteran
- Buying a lowered priced home with a small down payment |
Convertible Arm
Starts out as an ARM but provides an option to lock in a fixed rate without refinancing. The option is available after a set time. |
- Interest rate is lower than fixed rate mortgage
- Locked in, predictable payments after conversion |
- Takes a risk on the rise and fall of interest rates for at least the intial period of time |
- Interest rates are high |