Interest Rate Comparisons for Types of Home Mortgages
02/09/09
Buyers can choose from a broad array of home mortgages. Even for first time buyers, it is possible to find a mortgage tailored to your needs. To choose the right home mortgage, you need to know what's available. This guide outlines the most common types available to you today.
The interest rate on an adjustable rate mortgage (ARM) rises and falls as the economy changes. When the prime interest rate goes up or down, your home mortgage's interest rate goes up or down too. This allows you to take advantage of periods of low interest, but also exposes you to the risk that the prime interest rate will rise sharply, hiking your interest rate and payments with it. Because the risk of rising or falling prime interest rates rests on you, not on the bank, banks offer lower introductory interest rates on adjustable rate mortgage loans than on fixed rate mortgages.
The interest rate on a fixed rate home mortgage is set, or fixed, for the term of the loan. This cushions you from the shock of skyrocketing interest rates, but also prevents you from taking advantage of falling interest rates. Banks assume that at least once, the prime interest rate will spike above the interest rate of your fixed rate mortgage and the bank will have to pay the difference itself. Banks offer higher interest rates for fixed rate mortgage loans than for adjustable rate mortgages to cover for this eventuality.
A convertible home mortgage loan is initially an adjustable rate loan, but you may convert to a fixed rate at any time during a set period in the duration of the loan. This is a good type of loan to choose if interest rates are high but are expected to drop. When interest rates are high you can get the benefit of an adjustable rate mortgage's comparatively lower rates, and when interest rates drop, you can lock in a lower interest rate for the remainder of the life of the loan.
A balloon home mortgage opens with an introductory period during which your interest rate is not only fixed, it is almost as low as the interest rate for an adjustable rate mortgage loan, rather than being high like a normal fixed rate loan. However, at the close of the introductory period, you owe the entire remaining balance of the loan immediately. Balloon loans are ideal for real estate investors who plan to resell the property before the end of the introductory period, or for homeowners who plan to refinance within the next few years.
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