There are four main types of mortgages that are often available to potential homebuyers, depending on their needs, qualifications, finances, and comfort zone. These include:
- Balloon: This type of loan is for a relatively short period (often between 5 to 7 years), requires very little down payment (other than fees, etc), and a somewhat affordable monthly payment. However, at the end of the period, the borrower must either refinance, repay the balance, or sell the home. This type of loan has short-term advantages, but also has potential longer-term considerations and ramifications.
- Adjustable: Many homeowners take advantage of an Adjustable-term mortgage, for a variety of reasons. The interest rate is lower than for a more conventional loan, which can make it more affordable. However, these terms and rates change from time to time, and the rate can increase, sometimes by a significant amount.
- 15-Year Conventional: A Conventional Mortgage is one which has the same monthly payments for the term of the loan. The only things which change are the allocations paid into escrow, for items such as real estate taxes, insurance, etc. The shorter the term, the lower the rate paid, but also the higher the installment payment.
- 30-Year Conventional: Conventional Mortgages are available in a variety of time periods, but the 30-year type is generally the most in-demand. Since nearly all mortgages no longer have prepayment penalties, those seeking to pay back in a shorter term increase their monthly payment, but have the flexibility to pay the regular amount when it makes the most sense for them. The principal is repaid over a longer period, which reduces monthly payments, but often lenders charge slightly lower rates for shorter-term loans.
The best mortgage for you depends on your personal circumstances, like your credit score, income, and your down payment. It’s important to speak to a mortgage professional and understand the terms and rates of the different types of mortgages available before making a decision.
