Pros And Cons Of Different Types Of Mortgages

There are different types of mortgages and each has its pros and cons. If you have been searching for a mortgage in the market for a considerable period of time, then you have possibly heard of the various types of mortgages available to you. Trying to choose between an adjustable, fixed, hybrid, reverse and balloon mortgage can be hard for anyone. You should be prepared before choosing a loan. What you'll find below are some common types of mortgages and their pros and cons:

1) Adjustable rate mortgages

An adjustable rate mortgage (ARM) usually carries an interest rate that can rise or decrease on the basis of existing market conditions. These loans normally have low interest rates in the beginning but following an adjustment, their rates can rise significantly.

Pros of ARMs

The low interest rate offered in the beginning is possibly the biggest advantage of an ARM. This makes them an attractive option for first time home buyers who might face problems with making payments during the initial phase.

Cons of ARMs

The cons related to an ARM are that the interest rate is sure to rise with time. Obviously, this can result in higher monthly payments, which is troublesome for many borrowers who are not ready for it.

2) Fixed rate mortgages (FRMs)

As the name suggests, an FRM carries an interest rate that remains constant. The repayment term can range from 5-30 years and these loans are usually regarded as the most dependable options.

Pros of FRMs

Because of the predictable payments, an FRM allows you to be able to anticipate your housing costs for the long term.  It gives you peace of mind to know that your interest rate and monthly loan payments will never vary with time. According to many mortgage professionals, an FRM should be everyone’s objective.

Cons of FRMs

Possibly the most significant drawback related to FRMs is that their interest rate might seem too high in the beginning. In addition, it is harder to qualify for an FRM than for other loans.

3) Balloon mortgages

A balloon loan has a fixed interest rate, however, the loan term usually ranges from 3-10 years. Following that period, the whole amount of the loan becomes due.

Pros of balloon loans

Balloon loans frequently offer some of the cheapest fixed interest rates. This loan is reasonable for those people who hope to have a lump sum amount by the maturity date of the loan.

Cons of balloon loan

Some borrowers do not have the ability to pay off the whole mortgage after just 10 years, which could result in foreclosure if they cannot refinance. Even if they âre able to refinance, they would probably be hit with a very high interest rate.

4) Hybrid mortgages

A hybrid loan is a blend of both ARMs and FRMs. They come with a fixed rate term, normally 5-10 years. Following this term, the loan turns into an ARM.

Pros of hybrid loans

The extensive fixed rate term is suitable for homebuyers who wish         to redesign their budget many years beforehand.

Cons of hybrid loans

Similar to an ARM, there are possibilities that the interest rate and monthly payments can rise throughout the duration of the loan.

5) Reverse mortgages

Reverse mortgages have been designed for seniors (aged 62 and over). With the help of these loans, they can convert a part of their home equity into tax-free income.

Pros of reverse mortgages

The most important advantage of these loans is the tax-free income. Borrowers do not have to repay the loan as long as they stay in their primary residence. There is no prerequisite of credit history or minimum income. In addition, borrowers remain lifelong proprietors of their residences.

Cons or disadvantages of reverse mortgages

Most reverse mortgages carry variable interest rates. Hence, there is a degree of uncertainty as far as interest rates are concerned. Consumers are also not allowed to borrow more than the value of their homes. On certain occasions, they are required to pay for origination fees, closing costs and servicing fees.