Types of mortgages: A few of the more common types of mortgages are listed below; each has its own advantages and disadvantages. You should take into account your financial situation and future plans when choosing a mortgage.
Fixed Rate Mortgage: Fixed rate mortgages offer a constant interest rate and fixed monthly principal and interest payments. A fixed rate mortgage may be a good option if you value predictability in your monthly housing costs or if you want to prevent your interest rate from rising with inflation. The most common terms for fixed rate mortgages are 15 and 30 years, though they can be shorter or longer.
Adjustable-Rate Mortgage (ARMs): Adjustable-rate mortgages start with a low interest rate and monthly payment; however, after a given period of time, the interest rate is regularly adjusted based on an index. Indexes are published books that reflect current financial conditions (common indexes are the London Interbank Offered Rate and the U.S. Constant Maturity Treasury). All ARMs have rate caps which determine how much the interest rate can change at each adjustment period. ARMs offer the benefit of low initial payments, which can free up cash for other expenses, and tend to be a good option if rates are fluctuating or will be lowering.
Balloon Mortgage: Balloon mortgages feature low payments, but are not fully paid off over their term. As a result, the remaining balance is due when the loan matures, usually after five or seven years, or the mortgage must be refinanced. Balloon mortgages offer the advantage of low monthly payments, and may be appropriate if you are planning on selling your home in the near future, are willing to refinance at maturity, or expect to have enough money in the future to pay the remaining mortgage balance.
Construction Mortgage: Construction mortgages offer an opportunity for those building homes to receive funds before their home is complete. Funds from your construction loan are placed in an escrow account and disbursed to you while your home is being built. During construction, your payments are for interest only. Once your home is complete, you may have the option to convert to a fixed rate loan.