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Adjustable Rate Mortgages (The ARM)
Your initial period for an ARM rate ranges from 1 to 10 years, after which, the interest rate may increase or decrease. If you see the term 5/1 ARM, it means that the first five years will have a fixed rate, and your rate may increase or decrease after five years. However, if your interest rate increases, then your monthly payments will increase as well. This loan is recommended for those who will live in the property for a short period of maybe five years.
Interest Only Mortgages
This may scare you since these loan types were terrible after the housing crash. But they are slowly gaining traction and may be a good loan. Additional legislation is now in place to protect and lessen the risk from both borrowers and lenders. With this loan, you can get both fixed and adjustable rate mortgages in which you pay only the interest for a predetermined period. But, when your initial period ends, your payments will adjust. If you know, you have a growing income, and then this is a good option for you since you will be saving money for the years covered. This can also work if you plan on selling the house after the interest period.
Payment Option Mortgages
This loan type is quite similar to interest-only loans, where you pay the interest or the interest and principal each month. The risk you take is when not enough money goes into the principal amount. But for those with variable income, those who get profit shares or commissions can benefit since they pay low monthly payments and then pay higher amounts to make up for the low payments to catch up with their loans.
Balloon Mortgages
Balloon payments mean that you are paying low monthly loans then these will end with a high one-time payment. These are fixed short loans with interest calculated with the same period as a long-term fixed loan. This loan will last from between 3 to 7 years, and the lump sum balance due at the end of the loan. The remaining balance can be paid off; you can sell, refinance, or switch to a fixed long-term loan.
The question of choosing between a fixed and an adjustable rate loan depends on your capability to pay the monthly payments and your long-term plans for the property. Set your goals, and shop around. Talk to your different lenders and see what they have to offer. Find the balance between security and flexibility. Take the time to study and ask around until you get the loan you deserve.
Disclaimer: Our service is not intended to be, nor should it be construed as financial advice. We help our readers make informed decisions via impartial information and guides. Where appropriate, we may introduce partner companies who can provide services relating to financial products.