Here’s some info about the 3 basic types of mortgage loans.
Fixed Rate Mortgage
A fixed rate home loan is a loan in which your interest rate is fixed and stays the same throughout the life of the loan. The interest is split equally in the monthly payment for the duration of the loan. When you use this loan, the initial payments are mostly applied toward interest with little applying toward the principal. Over the years, more of your monthly payment will be applied to the interest as the overall balance diminishes.
A fixed rate loan can be 10, 15, 20 or 30 years. The 30 year loan is the most popular because the payments are less and thus easier to handle.
Adjustable Rate Mortgage
As the name suggests the interest rate on this kind of loan can change from period to period. On years where the interest rate is lower, your payment is reduced. However, on years where the interest rate is higher, your payment increases depending on the type of adjustment you agreed to at the time of the initial loan.
There is a hybrid loan which is a combination of the fixed and adjustable rate mortgage. Your loan may be set on a fixed rate for a few years, and then it defaults back to an adjustable rate loan. This gives new homeowners the option of having a mortgage payment that is the same (easier to budget) and, when that time expires, the loan changes to an adjusted rate. Some young couples would rather know the exact payment for the first few years while they are getting their careers and budgets going. After a window of four or five years, they have more room to work with the budget. On the years when interest rates are lower, they save and on the years the interest rate is higher, they have more room in their finances to accommodate the change.
Interest Only Mortgage – Jumbo Loan
This loan is primarily used by people who have a lot of capital. Here is how it works; the home buyer has the option to pay interest only for a set period of time. Usually it is five, seven or ten years. They can pay on the principal during these years if they want to, but it is an option to only pay interest. This type of loan is usually reserved for people buying homes with loans of close to $700,000.00 or more.
At the end of their interest only window the mortgage is adjusted to include principal for the life of the loan. Of course that makes the payment take a huge leap (thus the term Jumbo loan).
No matter what type of loan you take, do your homework. Make sure you understand exactly what type of loan you are getting and that you can afford any adjusted payments. With adjustable rate loans the old saying “hope for the best but provide for the worse” applies. Most importantly, talk with a licensed mortgage professional about which loan is right for your particular situation. We know several who can help you get started!