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Types of mortgages

The three facets to a loan are size (the amount of money you want to borrow), interest (the percentage rate you pay on the loan), and term (the time it will take you to pay off your loan).

Picking the right mortgage is very important.  For one thing, you will be paying for mortgage little by little in the next thirty years.  It’s important to try to find a mortgage to fit you and how you want to pay it back.  The higher your interest you are paying, the whole money you be paying back for what your original is.  Furthermore, if you are paying your loan back over a very long period time, this will also increase the amount of money you have to pay back.  The thing you really want to do is to get an interest rate that is lower than the inflation rate.  This means that you will be paying back less money than you are actually borrowing.  This would be an ideal mortgage.  Not everything in life goes as planned; therefore we must make the best possible choice.

There are two basic types of mortgages.  The first is fixed rate mortgage, which means the monthly rate at which you pay the bank back is the same every month.  This is usually for 15 or 30-year loan.  A fixed rate mortgage guarantees a stable rate of paying back the bank.  This can work to your advantage especially when the loan takes a long time to pay back and the rate of inflation increase over the actual interest that you pay back.  Over time the value of your money is worth less and less because inflation decrease the buying power of your money.  It is important to consider if you can pay this monthly amount of a long period of time.

The second type of mortgage is an ARM, adjustable rate mortgage, where the interest rate of the mortgage changes over the lifetime of the loan to reflect changes in our credit market.  The first year rate of an adjustable art mortgage, the teaser rate, is usually a few percentage points below the market rate.  This means that your early loan repayment will be less than what it will be in a fixed rate mortgage.  The adjustable rate mortgage also comes with a cap, a maximum level of interest rate at which the loan can go up to.  This type of mortgage is great for those who want to pay less at the beginning of the loan period and expect have increase in income over the period of the loan.  The interest rate that can rise each year is also limited so that banks cannot sky rocket your interest rate just because they feel like it.  The interest rate usually goes up one or two-percentage point per year.  It is important to consider if you can afford to pay this loan back at its worst-case scenario.  The worst-case scenario is that the interest rate goes up and your ARM adjusts to its maximum.

Additional types of mortgages

The most adjustable type of ARM is COFI, cost of fund index.  A COFI loan doesn’t have any caps and the interest rate adjusts from month to month.  Even though the index of a COFI adjusts from month to month, it has the most stable index because it tends to be a slow moving index.  The COFI index is tied to the rate that banks have to pay their depositor to keep their money in forms of checking accounts, saving accounts, and certificate of deposit.          The advantage of taking a COFI loan is that you can vary the amount of your payments from month to month.  This loan is more adjustable to suit your temperament and your budget because you can choose to pay more or pay less as each month passes.  Inquire about this loan if you are interested because it is usually not brought up as an option.

A hybrid loan is a combination of a fixed rate mortgage and an ARM.  A hybrid loan is typically fixed for 1,3,5,7, or 10 years before it is converted into an ARM.  This type of mortgage can give you stability for a given amount of time.  After the adjustable rate mortgage kicks in, your mortgage interest rate will be determined by prevailing interest rates.

A two step loan attempts to provide borrowers with the stability of a fixed rate mortgage and the lower rates of an ARM.  The most common forms of two step loans are 5/25 and 7/23.  Both 5/25 and 7/23 add up to the number 30, which is the entire life of the mortgage in years.  The loan will be fixed for the first or seven years.  After the first term period of the loan is over, the loan will either become an annually adjusted ARM or a fixed rate mortgage.  The interest rate of a two step loan is generally lower than that of a standard 30 year mortgage.

Balloon loans are short term loans where you borrow money for a short period time like three or seven years.  You amortize a balloon loan as if the loan was a standard 30 year loan until the end of the three or seven year period.  At the end of the term of the loan, you have to pay the bank the entire remaining principal you owe in one lump sum.  You can use a balloon mortgage to your advantage in you are into short term investing and resell your house after you have finished paying off your mortgage.  You pay less in interest over the course of the loan and can save thousands of dollars in interest when compared to a normal 30 year loan.  Of course, paying the remaining principal in one loan sum can also be a task.