Below is a brief synopsis of the types – and the pros and cons – of some of
today's most popular mortgage loans.
| TYPE |
DEFINITION |
ADVANTAGES |
DRAWBACKS |
COMMENTS |
| 30–YEAR FIXED–RATE |
A long-term loan in which principal and interest are amortized over
30 years; both interest rate and amount of monthly payment remain
unchanged for life of the loan. |
Considerable tax benefits, especially in early years. Payments never
rise, regardless of inflation. |
Slow equity build-up. |
The most common mortgage in the U.S., a particularly good investment
when rates are low. |
| 15–YEAR FIXED–RATE |
As above, but payback period is 15 years. |
Usually lower interest rate than 30–year. Faster equity build-up.
Less interest paid out over life of loan. |
Higher monthly payments; less tax–deductible interest. |
Good option for buyers whose income will rise and/or when rates are
expected to drop. |
| ARM (Adjustable Rate Mortgage) |
A mortgage whose rate changes over time according to terms specified
by the lender, usually according to short-term Treasury Bill rates. |
Low initial interest rate, sometimes below market. Payments may
decrease over time. |
Payments may increase over time. Risky if rates rise significantly. |
Good option for buyers whose income will rise and/or when rates are
expected to drop. |
| FHA/VA MORTGAGE |
Government–insured or guaranteed mortgages that can make purchase
more affordable than conventional loans. |
Little or no down payment required. Marginally better rate than
conventional 30-year mortgages. |
Lower limits on the maximum that can be borrowed. VA requires
current or past military service record. |
Good option for first-time buyers with little funds to invest in a
down payment. |
| GPM (Graduated Payment Mortgage) |
A fixed–rate mortgage offering low initial monthly payments that
increase by a predetermined amount, then level off after about five
years. |
More affordable payments for first few years. Unlike ARMs, buyer
knows up front how much payments will rise in the future. |
Slower equity build-up. Buyer's income may not rise in proportion to
payments. |
Another good choice for buyers who expect income to rise after home
is purchased. |
| Balloon Mortgage |
A short–term (3-5 year) loan, usually at a fixed rate. Paid back in
equal, monthly payments and a final "balloon" payment for the remaining
balance. |
Lower monthly payments. Full tax benefits. |
Little or no equity build–up. Monthly payments are often interest
only. Balloon payment usually requires refinancing or selling the house.
|
Designed for buyers who plan on moving within a few years and/or are
confident in the short-term appreciation of a property. |
