3 Types of Home Mortgage Financing Options

When choosing a mortgage, you have a variety of options - from fixed rate to adjustable rate and balloon payments. To learn more about the different types of mortgage financing that are available, keep reading.

Adjustable Rate Mortgages (ARM)

Adjustable rate mortgages tend to be popular when interest rates are high. The rate typically starts low and is then set to an interest rate based on the current standard or prime rate.

The benefit of an adjustable rate mortgage is that if interest rates in general fall, so does yours and, subsequently, your monthly payments drop as well.

However, if interest rates rise, the inverse is true. Typically though - and this is true if interest rates are high - a homeowner with an adjustable rate mortgage will wind up paying more in interest charges over the course of a 30-year mortgage than one who has opted for a fixed-rate mortgage.

To opt for an ARM means you need a strong stomach as interest rates rise and fall. You've got to be emotionally stable enough to assess your benefits and risks ahead of time and resist the urge, for example, to kick yourself if the rates go up and you need to begin paying more on a monthly basis.

Fixed Rate Mortgages

The fixed-rate mortgage is your traditional mortgage. A home buyer walks into a bank, is offered a particular interest rate on a 15 or 30 year term, and knows exactly what the monthly payment will be every month, how long it will take to pay off the loan and exactly how much it will cost in interest charges.

The fixed-rate mortgage offers stability and organization alongside the protection from high interest rates. While the fixed rate mortgage is a great way to go if interest rates are low or you're planning to stay in your home for more than 5-7 years, they're not a good idea if interest rates are exceptionally high at the time you lock in a rate.

Balloon Mortgages

A balloon mortgage is basically a loan that has a shorter loan term than its amortization period. Essentially, with a balloon mortgage, the mortgage may have a 10-year loan term, but be amortized over 20 years. So, once the 10 years is over, the borrower must then pay the remaining full principal owed on the loan in one large, final sum known as a balloon payment.

While this option can be great for families who either only want to be in the home for a short period, are planning to simply "flip" the house, or are expecting a surge in income or influx of cash down the line, it's not for those who will be unable to make the final balloon payment.

Failure to pay the balloon payment will result in foreclosure and the loss of your home. It puts such a homeowner in a vulnerable position as the balloon period nears, not only to pay off the loan or move to a different home, but also in a down housing market where there is a glut of unsold properties and buyers who basically call the shots, making it more difficult to sell your house at all.