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April 2, 2009There is an array of home mortgages available to buyers. Even if you are a first time buyer, you can find a mortgage that suits your needs. To choose the right home mortgage, you need to know what’s available. This brief guide will explain the most common types on the market today.
The interest rate on an adjustable rate mortgage (ARM) rises and falls as the economy changes. If the prime interest rate rises, your home mortgage’s interest rate rises too. This lets you get the maximum benefit from periods of low interest, but also means that if the prime interest rate rises sharply, your interest rate and monthly payments will rise with it. Because the risk of rising or falling prime interest rates rests on you, not on the bank, banks offer lower introductory interest rates on adjustable rate mortgage loans than on fixed rate mortgages.
The interest rate on a fixed rate home mortgage is set, or fixed, for the term of the loan. This cushions you from the shock of skyrocketing interest rates, but also prevents you from taking advantage of falling interest rates. Banks assume that at least once, the prime interest rate will spike above the interest rate of your fixed rate mortgage and the bank will have to pay the difference itself. To cover for this eventuality, banks set the interest for fixed rate mortgage loans higher than that for adjustable rate mortgages.
A convertible home mortgage loan begins as an adjustable rate loan, but you have a period of time during which you are allowed to convert to a fixed rate. This is a good choice of loan if interest rates are currently high, but you foresee a drop in rates. You can take advantage of the lower interest rate of an adjustable rate home mortgage when interest rates are high, then lock in a better interest rate for the life of the loan as soon as rates drop.
A balloon home mortgage opens with an introductory period during which your interest rate is not only fixed, it is almost as low as the interest rate for an adjustable rate mortgage loan, rather than being high like a normal fixed rate loan. However, at the close of the introductory period, you owe the entire remaining balance of the loan immediately. Balloon loans are a good choice for people who need a loan to tide them over for a few years until they can refinance at better rates, or who intend to resell the property before the end of the introductory period.
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The home mortgage delinquency rate has continued to rise, as many home owners struggle with declining property values and more restrictive lending practices. 2008 saw an 80 percent rise in the number of foreclosures from the year before with an estimated 2. 3 million consumers dealing with foreclosure. Many are predicting that those filings could more than triple in the years to come. Many borrowers took on a home mortgage that was more than they could afford in the long run, as they felt certain the real estate market would maintain its upward trend and credit seemed easy to come by.
Great info.
This brief guide will explain the most common types on the market today.
The interest rate on an adjustable rate mortgage (ARM) rises and falls as the economy changes. When the prime interest rate goes up or down, your home mortgage’s interest rate goes up or down too. This allows you to take advantage of periods of low interest, but also exposes you to the risk that the prime interest rate will rise sharply, hiking your interest rate and payments with it. Because you, not the bank, absorb the risk of rising or falling prime interest rates, banks set the introductory interest for adjustable rate mortgage loans lower than those for fixed rate mortgages.