Which Mortgage Is the Right One for Me?

You’ll probably need a mortgage to purchase the piece of real estate you have your eye on, but the question is which mortgage? There are many different types of loan products that you can use to get the property you want. Here are a few of the most important options to consider.

Fixed Rate Mortgage (FRM)

A fixed rate mortgage is one in which the interest rate does not change. It is tied to the current prime rate and remains at this level for the life of the loan. Since the rate is locked in, these loans tend to start at higher rates than adjustable rate mortgages.

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage is one in which the interest rate can fluctuate based on the prime rate. These loans usually start with lower rates than fixed rate mortgages but over the life of the loan, the FRM usually comes out to be cheaper.

Variable Rate Mortgage

There are different types of hybrid mortgages that start as ARMs and then switch to FRMs. These are appealing options as they provide the most flexibility for the borrower. Some variable loans also allow you to adjust your monthly payment depending on the circumstances. Your lender can talk to you in depth about these options.

Balloon Payment Mortgage

With these mortgages, the rate and monthly payments tend to be lower. The catch is that once the term of the loan payments expires, the mortgage will still not be fully paid off.

The balloon payment is the larger amount required to take care of the remainder of the balance at the end of the mortgage loan term. This can be an appealing option but a tricky one, as borrowers without a plan for handling the balloon payment could find themselves in real trouble down the line.

80/20 Mortgages

An 80/20 mortgage involves a second mortgage taken out to cover the remainder of the costs of the home after the first loan has been applied. Borrowers choose an 80/20 mortgage in order to avoid paying Private Mortgage Insurance (PMI), which kicks in on loans for more than 80 percent of the price of the house.

Subprime Mortgage

If you have less than perfect credit, it may be difficult to get a mortgage loan. Subprime lenders offer loans to those without the credit for a traditional loan. These mortgages have a higher rate of interest to offset the risk to the lender. Only take out such a loan if you are sure you can afford to make the payments, no matter how persistent the lender is.