Mortgages at a Glance
Below is a brief synopsis of the types – and the pros and cons – of some of today’s most popular mortgage loans.
|30–YEAR FIXED–RATE||A long-term loan in which principal and interest are amortized over 30 years; both interest rate and amount of monthly payment remain unchanged for life of the loan.||Considerable tax benefits, especially in early years. Payments never rise, regardless of inflation.||Slow equity build-up.||The most common mortgage in the U.S., a particularly good investment when rates are low.|
|15–YEAR FIXED–RATE||As above, but payback period is 15 years.||Usually lower interest rate than 30–year. Faster equity build-up. Less interest paid out over life of loan.||Higher monthly payments; less tax–deductible interest.||Good option for buyers whose income will rise and/or when rates are expected to drop.|
|ARM (Adjustable Rate Mortgage)||A mortgage whose rate changes over time according to terms specified by the lender, usually according to short-term Treasury Bill rates.||Low initial interest rate, sometimes below market. Payments may decrease over time.||Payments may increase over time. Risky if rates rise significantly.||Good option for buyers whose income will rise and/or when rates are expected to drop.|
|FHA/VA MORTGAGE||Government–insured or guaranteed mortgages that can make purchase more affordable than conventional loans.||Little or no down payment required. Marginally better rate than conventional 30-year mortgages.||Lower limits on the maximum that can be borrowed. VA requires current or past military service record.||Good option for first-time buyers with little funds to invest in a down payment.|
|GPM (Graduated Payment Mortgage)||A fixed–rate mortgage offering low initial monthly payments that increase by a predetermined amount, then level off after about five years.||More affordable payments for first few years. Unlike ARMs, buyer knows up front how much payments will rise in the future.||Slower equity build-up. Buyer’s income may not rise in proportion to payments.||Another good choice for buyers who expect income to rise after home is purchased.|
|Balloon Mortgage||A short–term (3-5 year) loan, usually at a fixed rate. Paid back in equal, monthly payments and a final “balloon” payment for the remaining balance.||Lower monthly payments. Full tax benefits.||Little or no equity build–up. Monthly payments are often interest only. Balloon payment usually requires refinancing or selling the house.||Designed for buyers who plan on moving within a few years and/or are confident in the short-term appreciation of a property.|