When you're shopping for a new home—especially for
first time—all terms and expressions may be confusing and difficult to understand. Adjustable rate, fixed rate, balloon payment - how do you decide which is right type of home mortgage for you if you're not even sure what each of them are?The name of mortgage type usually has to do with how you'll pay for your loan - how interest on loan is being determined by bank. The three major types of mortgages are fixed rate, adjustable rate and balloon payment. Each has advantages and disadvantages.
Fixed Rate Mortgage
With a fixed rate mortgage, you have a set interest rate for entire life of loan. The interest rate that you pay for your loan won't change - which means that you'll pay same monthly payment for entire length of loan. This protects you from unexpected rises in interest rates that would increase your monthly payment. At same time, should interest rates drop, you will have option of refinancing at a lower interest rate. Because protections are largely on side of buyer with a fixed rate mortgage, interest rates on them are generally slightly higher than they would be on other types of mortgages.
A fixed rate mortgage is safest type. Because payments are predictable, it’s usually considered most desirable type of mortgage. Always choose a fixed rate mortgage if interest rates are rising.
Adjustable Rate Mortgage
When you choose an adjustable rate mortgage, your monthly payment and interest rate will fluctuate with current market interest rate. If interest rate goes up, so will your monthly payment. If it drops, your monthly loan payment will as well. The adjustable rate is tied to an index, which is determined by lender. Other terms of mortgage are also determined by lender. These include how often interest rate is adjusted - anywhere from every 3-6 months to once a year, how much interest rate can increase or decrease on any adjustment date, and whether there is a 'cap' on how high interest rate can rise.
