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Different Mortgage Loans
Different Mortgage Loans

An Insight on The Different Mortgage Loans

While buying home, we  must choose the right  mortgage loan.  Our choice to take a mortgage determines  how much we can pay every month along with interest rates and how long we want to take to pay it off.  It is vital for us to know what the mortgage choices  are as per our suitability and requirements. Below are options relating to mortgage loans:

  • Fixed Rate Mortgage

Fixed rate mortgage means you got to pay a fixed principal and interest for the entire tenure as it remains the same. This type of mortgage suits most of home buyers  as the interest  component  is ‘locked ‘ for the entire tenure. Such mortgage could be for 15 years or 30 years. The longer the tenure, the higher the interest rate; however the longer tenure also gives enough space to you as you pay conveniently every month. You can also choose to be flexible with your 30 year mortgage by attempting to pay it off as early as possible which ensures you some savings. In some cases, if a borrower finds paying off a 30 year loan in say 15 years he can always do so and then switch back to his 30 year payment mode. This method gives the requisite flexibility to the buyers.

  • Adjustable Rate Mortgage (ARM)

In this option, the interest rate varies on a regular basis and thus, the monthly payments. The lender will share with you how and  how often the rate is set  which could be quarterly, annually or semiannually.  The ARM mode can be very expensive for the buyers than the Fixed Rate Mortgage as frequently he needs to deal with a higher mortgage payment owing to varied interest rates. An advantage of an ARM is your interest rate at the inset of the loan could be less. Sometimes, the interest rates are less than a 15 year Fixed Term mortgage even !  ARM can be effective if you manage to refinance your loan before the interest rates start spiralling up.

  • Hybrid ARM

The next type of mortgage is Hybrid ARM, this mode will have a fixed interest rate for a definite period of time and then the interest rate rises. An example could be 5/1, 7/1 ARM, where the rate remains fixed for 5 years, 7 years etc. before being revised.  There are three kinds of cap with hybrid ARM.

 

Initial Adjustment – Under this cap, once the fixed term is over, the first adjustment to the rates can be made. A cap for a 5/1 hybrid  could be 5% which indicates that 5% can be added over and above the initial rate for the first adjustment.

Rate Adjustment -  this indicates the maximum/highest adjustments made to the rate. For example, if the cap is 3%, the lender would never  increase the rate beyond 3%, regardless of the market  demands.

Lifetime -  This is the cap where once you reach the higher interest rate, i.e. the highest lifetime cap, the interest rate  would not climb any higher. A Hybrid ARM with one of the above Caps might work best for you  as per your circumstances.

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