Description: Utility 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’ve possibly listened about 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 geared up before choosing a loan. Given 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 a low interest rate in the beginning but following adjustment, it 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 to make payments in 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
An FRM enables you to make your budget for the long term as you are aware that your interest rate and monthly loan payments would 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 their interest rate might seem too high in the beginning. In addition, it is harder to qualify for an FRM than 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 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 don’t have the ability to pay off the whole mortgage following just 10 years, which could result in foreclosure if they can’t refinance. Even if they’re 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 is switched 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 would 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 don’t 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’s a degree of uncertainty as far as interest rate is concerned. Consumers are also not allowed to borrow more than the value of their homes. On certain occasions, they’re required to pay for origination fees, closing costs and servicing fees.
