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MORTGAGES
There are many different varieties of mortgages (fixed,
ARMs, balloon, etc). The two most common types are fixed rate and variable
rate. The lender "usually" wants a 20% down payment or the borrower
may pay Private Mortgage Insurance (PMI) but you can avoid PMI with different
strategies such as a piggy back loan.
Fixed Rate Mortgages
Fixed Rate Mortgages come in a variety of time frames the most common are 15 year, and 30year but some companies have a 40 year mortgage. The key quality of a fixed is that the rate you get at the beginning stays the same and the payments are equal through out the mortgage term.
| Pros: | Cons: |
| No surprises, you know
the rate and the payment and that's what you pay. The lender assumes
the risk of interest rates rising. |
Rates are usually higher when compared to a variable rate mortgage, because you and the lender are locked in for a specified time frame. The longer the time frame the higher the interest rate. |
Variable Rate Mortgages
Variable Rate Mortgagestypically call Adjustable Rate Mortgages (ARMs) have a set time where the rate and payment is the same, usually the first number and then the rate adjusts typically annually after that. Such as a 5/1 ARM has a fixed rate for the first 5 years and adjusts annually. There are caps that set the upper rate limit.
| Pros: | Cons: |
| The rates are usually
less than a fixed mortgage, and interest rate increases are limited
by the caps. The lender assumes the interest rate risk. |
The rates change so your payments would change based up on the interest rate. There is potential that you may pay different amounts from when you first took out the mortgage. The payments may be higher or lower. The borrower assumes the risk of interest rates rising. |
