Straight Talk About Different Types Of Mortgages

by Robert Grant on February 25, 2012

The topic of different types of mortgages may often leave people in a daze. This is almost certainly not because they are disinterested in the topic, but instead because any discussion of mortgage types is usually filled with industry specific terms sprinkled with plenty of acronyms. Any person interested in purchasing a home is usually very interested learning about mortgages available, however some people feel they might need an interpreter to understand it.

That may not necessarily be so if a few explanations are given before launching into a discussion about different types of mortgages. Basically there are three distinct types of mortgages, and each has several variations which add a little twist to how they are paid off and how much the interest rate may be. Each of these types of mortgages can be beneficial in specific circumstances. It is however very important that a home buyer remember that rates can change either in their favor or against them and preparation should be made either case.

The most traditional type of mortgage is the fixed rate mortgage. Almost everyone’s parents have a fixed rate mortgage and it is still preferred by more conservative home buyers. Fixed-rate mortgages have the same payment and rates from the beginning of the loan to the final day. Interest rates do not change and it is a very predictable type of mortgage. The acronym for fixed rate is FRM.

The second type to consider is the variable rate mortgage which at some point in time will change. And many home buyers hope that it changes in their favor and it can. On the other hand it can also go up and there are some very complex ways of computing how much it will go up or down and when. While the rates could change in the borrower’s favor they should also be prepared to make payments if rates rise.

There is also the ARM, this stands for adjustable rate mortgage and this could be considered a mixture where initially the rates are fixed somewhat below prime, but will be adjusted later on. High interest rates may have been a barrier to many home buyers for a while so the ARM was developed so that a specific period of time the rates were fixed and often below market. However when that time is over interest rates may increase. They can increase quickly or slowly. A buyer choosing this option will get a good rate which will end up being market or above in the end. This means they should be prepared for increases in payments.

There is no exact right one for each and every home buyer. Conservative borrowers may prefer stick with its rate mortgage despite the fact that they may not be safe in interest rates when the rates drop. However when selecting a type is important that there be a sound financial plan as well as contingency plans to ensure the borrower can make the payments and remain in their home.

Mortgage types do not necessarily have to put a room to sleep, understanding them is essential for a person planning a new home purchase or even financing in the future. Basically the choices come down to what options seem most attractive and what an individual’s view of the interest rate over time is. Risk taking may be part of the process with some mortgages but if sufficient income exists to assure that the home mortgage can be covered even during times of higher interest rates, it can bring benefits as well.

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