There are many different types of mortgages to fulfill various needs that one might have. Most lenders should be able to detect which type of mortgage is best for you: the one which will fulfill your needs, but is also affordable based on your credit. Then the lender will show you the various types of mortgages. Here are four main mortgage kinds, including fixed, adjustable, 1-yr treasury adjustable, and intermediate adjustable rate.
A fixed mortgage has an interest rate that does not vary when the rates fluctuate. Fixed rates are fixed for an agreed amount of time. They are nice because you always know exactly how much your monthly bill will be. You will never be guessing whether or not the interest rates are going up or down and by how much. On the other hand, fixed-interest rates will not go down as interest rates drop. If the rates do drop enough, you are able to refinance the mortgage loan. Overall, fixed-rate mortgages are the more conservative mortgage types.
Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages vary along with an indexed rate and a set margin. There are limits to the minimum and maximum rates that the rate can adjust to called rate caps. Adjustable-rates are lower than fixed-rates at the time of the loan. These are very common among buyers who are: not planning on staying in a house for long; are in a market where houses are appreciating rapidly; or are planning on refinancing. The problem is that the rates do adjust and one should always expect the worst – that interest rates will increase not decrease. With adjustable-rates, people are trying to start off with low rates that will make up for the higher rates that are bound to come. While doing preliminary research, you should check out the frequency of the adjustments. The more frequent, the lower the initial rate will be, but the more unpredictable the fluctuations will be. The less frequent, the higher the initial rate will be, but it will also be more predictable. It is important to understand how much you could possibly be paying and how much you can afford.
1-yr. Treasury ARM
The 1-yr. treasury adjustable-rate loan is a fixed-rate for the first year, after that it becomes an adjustable rate. The new rate is ultimately determined by the treasury average index plus the loan margin. This rate is usually given out for a term of 30 years. The benefit of this mortgage is that the rates are usually lower than fixed rates and you will pay less when interest rates go down. It is important to keep track of the margin, which is added to the index to make up the new adjusted rate. It is possible to end up paying more than you would for a fixed-rate if the index increases enough.
The intermediate ARM is fixed, and then adjusts by a predetermined schedule. Commonly, the rates are fixed for three years and then adjustable for one. The new rate is based on an economic index plus the loan margin. These mortgage loans are usually given for 30-year term limits. A pro is that the rates are lower than fixed rates; as interest rates increase, you tend to see more ARMs because they are easy to qualify for. The problem with this loan, as it is with all ARMs, is that once the initial period is over, the loan will adjust – most of the time to a higher interest rate.