Do you know the ins and outs of the three most common kinds of mortgages? Most of us are pretty familiar with two of the three, but there is a third that gives many home-shoppers a bit of trouble. Let’s take a look at the three mortgages available to home buyers and examine their key differences, based on information from the experts at Bankrate:
Note: There are actually more than three types of mortgages, but for the most part, especially if you are a first-time buyer, you’ll only need to know about three. They are the fixed-rate, adjustable-rate and interest-only mortgage contract.
With fixed rate loans, you pay the exact same interest rate for the life of the contract, whether that means 5, 10, 15, 20 or 30 years. Of course, the 30-year mortgage is by far the most common because it lets buyers spread their payments out over the longest period of time. This allows some ease of payment. Keep in mind that with a fixed rate mortgage, you’ll not be paying much of the principal during the early years of the loan.
As the name implies, adjustable-rate loans charge different amounts of interest each year based upon some benchmark rate like the interest paid on Treasury bills. There are even “hybrid” mortgages. They behave like fixed mortgages for the first few years and then turn into adjustable rate loans later on. Ask your financial adviser about what kind of mortgage is right for you. Hybrids are “hot” right now, and allow buyers to calibrate the amount of interest flexibility that is just right for their situation.
• Interest-only Jumbo Loans:
For homebuyers who are shopping in the $625,000-and-up range, these loans let them pay only the interest for the first few years of the loan. After that, most IOJ loans become adjustable mortgages for all intents and purposes.
Think about what type of mortgage is right for you before you begin looking for properties. For some, fixed-rate loans are the best deal, while others will opt for the adjustable-rate mortgages. Which is best for you will depend on your income, credit and personality. Always do your research prior to committing to any financial contract.