Choose Your Mortgage Loan Type Wisely
By David Ackley
05/22/2006
Mortgages quite simply are the use of property as collateral against the repayment of a loan. When you take out a mortgage loan, your new home in essence, is the insurance the bank or lender has that you will pay back what you owe. If you fail to repay, they can claim full ownership of the property and liquidate it to satisfy the debt. Typically there are three types of mortgage loans used in real estate: fixed rate, variable rate and balloon.
A fixed rate mortgage maintains the same interest rate throughout the lifetime of the mortgage. Several fixed-rate mortgage types include 30-year, biweekly and convertible. Fixed-rate mortgages are a very conservative choice because you will know up front what your interest rate is, regardless of the market condition.
A variable rate mortgage is fixed at the beginning of the term for a set number of years (typically 3 or 5 years), then changes based on market conditions. This is also known as an ARM, or Adjustable Rate Mortgage. So, a three-year ARM would be fixed for three years, then variable. A 5-year ARM would be at a fixed rate for five years, then variable for the length of the term. Typically people take out these kinds of loans when they intend to sell the property before the 3 or 5 years has expired, because they can get a better rate for a short period of time.
Balloon mortgages require that a fixed rate of interest and a fixed monthly payment be given for a specific amount of time. At expiration of this time period, the entire remainder of the loan must be paid in full.
Each of these loan types has its pros and cons. You will need to determine which is best for you and your current circumstance. Just use a little common sense and you should be able to make a very wise decision.
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