Benchmark Mortgage

Fixed-rate mortgage

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: 

• The interest rate starts out lower than the rate on a fixed-rate mortgage, then adjusts regularly based on market indicators.
• The starting rate stays fixed for between three months and 10 years, depending on the ARM product.
• Most ARMs adjust annually, but some adjust on a semi-annual or monthly basis.
• Individual adjustments are capped at a certain amount, and the rate can never exceed the lifetime cap.

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.

Balloon mortgage

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: 

• Only plan to stay in your home for five to seven years
• Don’t expect rates to rise significantly before the loan matures
• Expect to have the money to make the final payment at the balloon date
• Want predictable monthly payments

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.

• Home equity loans give you the cash you need as a single up-front payment, which you can repay at a fixed rate.  If you know exactly how much you need to borrow, a home equity loan may be the best option.
• Home equity credit lines give you a revolving source of cash that you can draw from as you need to, up to a maximum amount.  The line carries a variable rate with an interest-only option, and you pay interest only on what you actually use — not the total amount of the credit line.

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:

• Income and debt. How much money you make and what other bills you have to pay helps the lender determine whether you can afford to make mortgage payments.
• Assets. The lender needs to make sure you have enough money to cover the costs of buying a home.
• Credit. Whether you've met other financial obligations helps the lender predict whether you will repay your mortgage.
• Property. The home you want to buy has to be worth enough to act as collateral for the mortgage.