Which Mortgage Loan Is Right For You?
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Today’s guest post comes your way from the SVB at The Digerati Life – a personal finance site that offers tips and resources on saving, investing and debt management. Check out the site’s coverage of topics that range from balance transfer credit cards and debt management strategies to money management software reviews.
Now that the housing market has fallen to its knees, a lot of people I know are quite excited to buy into this buyer’s market. They are all ready to purchase a new house, and maybe check out foreclosures in hard stricken areas. A good friend of mine even got the opportunity to purchase a large home in a region that was hard hit by the foreclosure tsunami.
Well, if you’re ready to become a homeowner, you’ll need to evaluate what kind of mortgage loan you intend to take out. Granted, you’re probably not keen on doing a pure cash transaction, no matter how cheap the houses are these days. So let’s take a look at the different types of mortgages you can get. This cursory review may help you gauge which loans are ones you’re most comfortable with.
Each type of mortgage loan is designed for a specific purpose. The type of mortgage you would request for would be dependent on your financial condition, the home price as well as the interest rates.
Here are some of the more common mortgage loans around:
Fixed Rate Mortgage Loans or FRMs
This loan comes with a monthly payment that is predetermined and remains unchanged throughout the loan term. Fixed rate mortgages are the most popular type of home loans around.
Most FRMs are available for 15 and 30 year loan terms. A 30-year fixed rate mortgage loan comes with lower monthly payments but with increased interest rates. To pay off an FRM faster, check whether you can make prepayments towards your loan. Many lenders allow prepayments without penalties.
This is the kind of mortgage I actually have. I have committed to an accelerated mortgage with a fixed rate 15 year term. As a result, I’ve enjoyed a lower interest rate locked in at about 5% per annual, and my house will be paid off free and clear by the year 2014!
Adjustable Rate Mortgage Loans or ARMs
After an introductory phase, the interest rate on an adjustable rate mortgage is readjusted at regular time intervals in order to maintain it in proportion to the prevailing market interest rates. For instance, a 5/1 ARM comes with a fixed interest rate for the initial 5 years, adjusting once every year from then on. The lenders fix the interest rate by summing up a margin with an index rate. Familiar indexes are Treasury Bill yields and the Cost of Funds Index.
Most adjustable rate loans are offered with a lifetime cap and periodic rate cap. The periodic rate cap is used to restrict the amount the interest rate can rise every adjustment period. The lifetime cap is used to restrict the amount the interest rate can rise throughout the loan term.
When you have a payment cap in your mortgage loan agreement, you might experience negative amortization of your loan, which, unfortunately, might result in raising the amount you owe.
Convertible Mortgage Loans
A convertible mortgage loan is an adjustable mortgage that permits you to switch to a fixed rate mortgage loan at or earlier than a particular period. The conversion benefit allows you to begin with a low adjustable rate, followed by possible lock in at a time when fixed rates fall even further.
Balloon Mortgage Loans
These loans are frequently offered with interest-only payments. The loan principal here isn’t amortized and the whole loan amount becomes due when the loan term ends. A balloon mortgage enables you to lower your monthly payment till you refinance the loan. One more benefit is that a greater part of your payment might qualify for a mortgage interest tax deduction.
So what type of mortgage loan would you consider taking out? Which do you consider to be the best home loan for you? I’m a pretty conservative borrower, so I would tend to gravitate towards the loan that offers the cheapest terms. Given what’s happened with the real estate industry, it’s probably wise to stick with the most affordable loans, and if they happen to be out of your reach, then it may not be the right time to buy just yet. There’s nothing wrong with having to wait things out when it comes to buying a house. After all, owning a house is one of the biggest commitments you’ll make in your life.
Thanks to SVB and make sure to check out The Digerati Life!
Photo by: Bill Ward
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Hi, I'm Austin Morgan. I live in Japan, teach English, and write about personal finance. I hope you enjoy FF and feel free to 
Now if that Lego pic isn’t the neatest! :) A fixed rate mortgage is the most conservative mortgage out there. You should make it your first choice if your shopping for a mortgage.
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Austin Reply:
February 4th, 2010 at 2:53 pm
Thanks for the advice and picture compliment ;)
Do you own a home?
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I would have to say there is something that is slightly more important than the type of mortgage. How much money you are actually going to put aside to pay off your house. If people can put aside a number and then choose the best mortgage to work within that number they might be able to do a better job of paying off their house. What I’m saying is it’s not always best to pay off your mortgage directly but indirectly might make you a lot better off financially.
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Austin Reply:
February 8th, 2010 at 11:15 am
Great point. Not everyone can follow one guide to mortgages. You have to see what works for you.
Do you own?
Thanks for the comment!
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