Fixed, Adjustable, Convertible, Balloon: Know the Differences Before You Apply
A mortgage allows you to achieve your dream of becoming a homeowner; but not knowing the difference between a fixed rate mortgage and an adjustable rate mortgage can get you into a lot of trouble – possibly even leading to foreclosure. There are principly 4 different types of mortgages which you should know about. A little bit of legwork now, can save you a lot of grief down the road, so take a minute to familiarize yourself with the terms below:
The Four Major Types of Mortgages
Fixed-Rate Mortgage – The most common type of mortgage. A fixed-rate mortgage allows you to lock into one rate for the entire life of your loan. The biggest advantage is that you will know exactly what you will pay every month of every year, for the next 15 to 30 years. If you like to organize your finances and know what your bills will amount to each month, this is the mortgage for you.
Adjustable-Rate Mortgage (ARM) – ARMs begin with an initial interest rate, which usually lasts 5 to 10 years, which then begins to adjusts even so often, depending on what the current market rates are. This will happen throughout the remainder of the loan. Take a 5/1 ARM as an example – For 5 years you will be locked into your initial rate then, once those 5 years have expired, your rate will adjust annually.
Convertible Mortgage – This special type of mortgage brings together the advantages of a fixed-rate mortgage and an adjustable-rate mortgage. It allows you to start with an ARM and then convert it to a fixed-rate mortgage to lock down your current rate for the life of the loan. This is nice because if your rate adjusts to a lower rate than you started with, you can lock down that rate for good. The catch is that you are only able to convert your mortgage for a limited time. If you miss it, you are stuck with an ARM.
Balloon Mortgage – This mortgage will benefit borrowers who cannot afford the full payments of a fixed-rate mortgage. A balloon mortgage allows you to pay a lower monthly payment for 10 to 15 years, but the balance of the mortgage will become due at that time. So, if you take out a $250,000 mortgage and pay $150,000 over 15 years, you will be expected to give the lender a payment of $100,000 at the end of that period.
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5 Responses to “Fixed, Adjustable, Convertible, Balloon: Know the Differences Before You Apply”
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I am leaning towards fixed rate mortgages for the time being. Who knows how the interest rates are going to go with all this financial uncertainty!
Dear Ms. Money Penny,
I second that. Fixed rate are the best. Less headaches.
Rgds
Money Penny : The Islamic Loan Financing gears towards fixed rates. I suppose the rates can only go up judging from the current global economy meltdown.
Avatar : Have you got yourself a loan using fixed rates?
Thanks Pablo. However, I’m really quite lost on how the Islamic Financing Loans work. Are they essentially the same as the normal mortgage financing facilities?
Money Penny : Though it is stated that Islamic Financing Loans are based on syariah principles and fixed rate interests (they call it profits), they are essentially like normal mortgage financing facilities – just called in another name. I do stand corrected on my point as I must confess that I am not an Islamic Financing expert. It is just my viewpoint from looking at the facilities as a layperson.