Understand Mortgage Options before House Hunting

Whether you are looking for your first place or downsizing for retirement, finding the perfect home can be harder than many people realize. Home buyers should know that finding the perfect location or floor plan are not the only decisions that have to be made. Finding the right mortgage to finance your dream home is equally as important.

Fixed Rate Mortgage

The fixed rate mortgage (FRM) is a loan option that generally comes in 10, 15 or 30 year repayment plans. The interest rate is determined and agreed upon at the beginning of the loan and does not change for the life of the loan. This means your mortgage payment stays the same and the amount of money applied to both the principle and interest is fixed. If you opt for a FRM that does not have penalties for early repayment, you can lower the amount of interest you pay over the life of the loan by making additional payments which will go toward the principle.

Adjustable Rate Mortgage

With an Adjustable Rate Mortgage (ARM) the interest rate is linked to an economic index, which goes up and down. This means your interest rate as well as payments will go up and down. There are many different types of ARM’s with different margins, adjustment periods, and indexes. Borrowers considering this type of mortgage should make sure they fully understand the potential risks and rewards.

Balloon Mortgage

More often found with commercial real estate versus residential properties, balloon mortgages do not fully amortize over the term of the loan. Basically when you have a balloon mortgage the payments are structured similar to a fixed rate loan, however the length of the loan is much shorter. This means if you have a 7 year balloon mortgage, when you reach the end of the seventh year, the remaining balance is due in full.

Interest Only Mortgage

Unlike loans that allocate part of your payment to interest and part to the principle, interest only mortgages (IO) allow borrowers to have payments which only cover the interest at the beginning of the loan (usually 5-10 years). To put it simply, the required payment each month will pay only the interest charges for that month. If home owners are unwilling or unable to pay more than the required amount, the loan balance will remain unchanged. This can result in substantially higher payments once the interest only period expires.

These are just a few of the many mortgage options available to consumers. Each potential home buyer has their own unique financial situation as well as short and long term goals. These factors should be considered when choosing the type of mortgage that will finance your home. Ultimately it is your responsibility to research, compare and understand the terms and conditions of any financial contract your enter. Finding the right mortgage is just as important as finding the right home; if you make a mistake on one, you might lose the other.