This type of mortgage offers a fixed interest rate throughout the entire term of the loan. A fixed-rate mortgage provides the security of knowing what your monthly payments will be for the entire length of the loan. In a volatile economic climate, this can be your safest choice. If you plan to stay in your home for the long-term, this type of mortgage may make sense. However, if interest rates go down you will find yourself paying a higher rate than necessary. In such a case you could consider refinancing, but the closing costs will have to be absorbed. If your personal financial circumstances change, one way to alter the monthly payments of a fixed-rate mortgage is to shorten or extend the term of the loan. In sum, a fixed-rate mortgage provides stability and security, but can be inflexible.
This type of mortgage stipulates a variable interest rate based on some index or benchmark. This means that the interest rate you are paying will vary according to economic conditions in the general market. Adjustable-rate mortgages normally provide an initial period before rates begin to fluctuate. During this initial period the interest rate is often very low — lower than what you would obtain on a fixed-rate mortgage. This means that if you plan to live in your home for a relatively short time (less than five to seven years), and adjustable-rate mortgage may be your best choice. Also, if interest rates decline significantly, your interest rate could go down with them. Be sure to check which index or benchmark your interest rate is tied to with this type of loan.
With this type of loan your monthly payments will be lower because you’re only paying interest, not principle. You can always contribute to principle if you have extra funds available. Keep in mind that the balance of your loan will not go down over time with this type of plan. This type of loan could be beneficial if you believe your income will go up in the future, at which point you will be able to pay higher monthly payments in order to pay down the principle of the loan.
Now you know what the basic type of loan programs are. However, there are many factors which vary among lenders and the loan programs they offer. Prepayment penalties which penalize you for paying off the principle of the loan early, ‘points’ which may be paid as a sort of down payment to procure a lower interest rate on the loan, and many other optional factors will affect whether a particular loan program is more or less advantageous. Always seek expert advice and consultation, and consider your options thoroughly, before selecting a mortgage loan package.