The fixed-rate mortgage has long been the most popular home financing product. With an interest rate that never changes, it provides stable, predictable monthly payments throughout the life of the loan. Your monthly payments won’t decrease if market rates go down, but you’ll have the comfort of knowing you are protected if rates go up.
If you plan to stay in your home for more than seven years, and prefer the security of stable payments to being at the mercy of the market, a fixed-rate mortgage may be the best option for you.
Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage has a low starting rate, so your initial monthly payments on an ARM will be lower than on a fixed-rate loan for the same amount. And because the amount you can borrow is based partly on how much you can pay each month, your maximum loan amount will probably be higher with an ARM.
Here's how it works:
Keep in mind that the interest rate and monthly payments can increase during the loan term. You may get the most value from an ARM if you plan to move before the end of the fixed-rate period, or if you’re buying at a time when rates are relatively high.
A balloon mortgage has a lower rate and lower monthly payments than a fixed-rate mortgage. Like an ARM, a balloon loan can help you either save money each month or get a larger loan.
Monthly payments on a balloon loan are fixed for the five- or seven-year loan term. A final “balloon” payment for the entire remaining balance is due at the end of the term.
A balloon mortgage is a good option if you:
Home equity financing
As you repay your mortgage, you will gradually build up equity in your home. You can borrow against that equity when you need cash, using either a loan or a line of credit.
1. What will a lender look at when I apply for a mortgage?
Lenders consider many factors in evaluating your loan application, but they usually focus on four areas: