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Types of Home Mortgages

Updated on August 19, 2014

A home is the most expensive investment that many people will make in their entire lives, and there are many options when it comes to taking out a home mortgage. Those looking to take out a home loan need to be acquainted with all of the choices that are out there for them to choose from.

Hanging houses in Cuenca, Spain. Getting a mortgage for this home might be problematic.
Hanging houses in Cuenca, Spain. Getting a mortgage for this home might be problematic. | Source

Lengths of Home Mortgages

Home mortgage contracts can be written for many different lengths. The most popular length is probably the 30-year mortgage. Most government-backed mortgages will require that borrowers choose this length.

Some people prefer a shorter term. The next most popular length for a home mortgage is a 15-year loan. The shorter term will allow the borrower to both pay of the loan more quickly and save on interest costs at the same time.

Some borrowers will take out a mortgage that lasts 10 or 20 years, but these seem to be much less common.

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Fixed-Rate Mortgages

Many people choose a fixed-rate mortgage. These loans are popular because borrowers will know exactly what their principal and interest payments will be over the length of the loan.

It is possible that home mortgage payments will vary a bit over time, but this will be the result of variations in insurance premiums and taxes that are paid through an escrow account. The principle and interest will stay the say unless the homeowner borrows more money or refinances the loan.

The best time to lock in a fixed-rate mortgage is when interest rates are low. Those who buy a home when rates are high might want to look into another option: the Adjustable Rate Mortgage (ARM)

Woodcut "Of Usury" attributed to Albrecht Durer. Depicts a moneylender from  Brant’s Stultifera Navis.
Woodcut "Of Usury" attributed to Albrecht Durer. Depicts a moneylender from Brant’s Stultifera Navis. | Source

When to Get an ARM

An adjustable rate mortgage can make sense when rates are high. Steep interest rates will eventually come down over time. Because the rate on an ARM is usually lower than the fixed rate, it is possible to save money in the short term. If/when the rates drop, the borrower can then try to refinance at the lower rate.

Those who plan to stay in a home for only three to five years might benefit from the lower rates. If they can sell the home quickly, they will not have to deal with any rate increases that come from the adjusted rates.

Adjustable Rate Mortgages

Adjustable rate mortgages, also known as ARMs, have a name that defines their main characteristic perfectly. ARMs have interest rates that will vary over time. This can be good or bad for the borrower.

Adjustable rate mortgages will frequently start with a short period in which the rate is fixed. This period will usually be between one and five years, although there are other options available from some lenders.

After the initial introductory fixed-rate period is over, the rate will then adjust to a rate that is more in line with current interest rates. If the rates are lower, the borrower will then save money. Of course, the rates are just as likely to rise, which can lead to higher interest rates.

The introductory rates on ARMs are usually quite a bit lower than the rate on the 30-year fixed mortgage. This makes them attractive options for prospective homeowners that think they can pay off their loan quickly.

A modern-style house in Canberra, Australia
A modern-style house in Canberra, Australia | Source

Interest-Only Mortgages

The last type of common home loan is the interest-only mortgage. These loans, as their name suggests, require only the payment of interest for a certain period. The downside of these loans is the fact that a borrower does not pay down any of the principle if they make only the interest payments.

An interest-only mortgage might be able to help a borrower who needs a very low mortgage payment for a period of time. When their financial situation improves, they can then pay additional funds to pay down the principle. Of course, this can be a problematic situation for those who do not improve their financial situation or those who choose not to be disciplined and pay down the loan. Interest-only mortgages are less popular than fixed-rate or adjustable rate mortgages.

Disclaimer

The information on this site is merely for informational purposes. Visiting with a lender to discuss borrowing options and which is the most beneficial for a given financial situation is necessary because not everyone will qualify for every type of loan.

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