For first time home buyers, deciphering between the different types of new home mortgages can be a difficult task. Even for experienced homeowners, it is not always easy to understand what makes one mortgage different from another. There are nine common types of mortgages that you can select to use on your house, each offering different benefits.
Fixed Rate Mortgage – A fixed rate mortgage maintains the exact same interest rate throughout the entire duration of the home loan. Generally, a fixed rate mortgage can be applied to a home loan in terms of 10, 15 or 30 years. However, you can sometimes negotiate the terms with your specific lender. A fixed rate mortgage is best for homeowners who intend to stay in their home for a minimum of 10 years. Under a fixed rate mortgage, your home payments will be exactly the same every month with no fluctuation.
One Year Adjustable Rate Mortgage – Adjustable rate mortgages are mortgage rates that change based on the current financial index determined by the market. Under an adjustable mortgage, your payments may increase or decrease depending on the market index. When using a one year adjustable rate mortgage, your payments will change annually for the entire duration of your home loan. This can benefit a homeowner as it can offer the lowest mortgage rate possible depending on where the market goes, but can be risky as your payments may also change dramatically from year to year.
10/1 Year Adjustable Rate Mortgage – Similar to a one year adjustable rate mortgage, a 10/1 year mortgage will change with the market. However, under a 10/1 year mortgage, your payments will remain the same for 10 years, and every eleventh year will change according to the market index. Homeowners who may be moving in 10 years will benefit from this type of mortgage.
Balloon Mortgage – A balloon mortgage is unique in the fact that the homeowner only pays the interest during the duration of the home loan. However, this type of mortgage is considered risky, as the loan is then due in its entirety by the end of the loan. The most common loan terms for a balloon mortgage are 3, 5 and 7 years. This type of mortgage is recommended for homeowners who wish to remain in their home past the duration of the loan, but who want to pay off their mortgage quickly.
7/1 Year Adjustable Rate Mortgage – This mortgage rate is just like the 10/1 year adjustable mortgage, but has a shorter life term. For the first 7 years of the mortgage, the payments will remain the same, and every eighth year the mortgage rate will change according to the market index. This is recommended for homeowners who may decide to move within 7 years of buying their home.
30 Due in 7 Year Mortgage – Also known as a 7/23 mortgage, a 30 due in 7 mortgage is a two step mortgage. The interest rate and monthly payments will remain the same for 7 years and will change according to the market index every eight years. This mortgage is recommended for homeowners who plan to stay in their home for more than 10 years but are willing to risk the payments and interest going either higher or lower every eight years.
30 Due in 5 Year Mortgage – This mortgage works the same way as a 30 due in 7 year mortgage. The mortgage on your house will remain the same for five years, and will change every sixth year. This mortgage is recommended for homeowners planning to stay in their home for at least 5 years.
5/5 and 3/3 Year Adjustable Rate Mortgages – This type of mortgage will have the same interest rate for the first number of years listed. For example, a 5/5 year mortgage will retain the same monthly payment and interest for the first five years. The second number indicates how often the mortgage rate will change depending on the market index. For example, for a 5/5 mortgage, the payments and interest will be the same for five years, and will then change every five years thereafter.
5/1 and 3/1 Adjustable Rate Mortgage – Under a 5/1 or 3/1 year adjustable rate mortgage, the first year indicates how long the current interest and monthly payments will remain the same, similar to a 5/5 or 3/3 year adjustable rate mortgage. However, under a 5/1 or 3/1 adjustable rate mortgage, the second number indicates that the interest and payments will change annually every year thereafter for the duration of the loan.
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