Mortgage Alternatives
WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH
Fixed Rate Mortgages: Payments remain the same for the the life of the loan
Types
15-year
30-year
Advantages
Predictable
Housing cost remains unaffected by interest rate changes and inflation.
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits
Types
Balloon Mortgage- Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan
ARMS linked to a specific index or margin
Advantages
Generally offer lower initial interest rates
Monthly payments can be lower
May allow borrower to qualify for a larger loan amount
WHEN DO ARMS MAKE SENSE
An ARM may make sense If you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS
30-Year:
In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
15-year:
Loan is usually made at a lower interest rate.
Equity is built faster because early payments pay more principal.
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