Getting pre-approved for a mortgage will make finding the right home a lot easier. However, you need to figure out which type of mortgage you want to apply for. Whether you plan on applying for a mortgage yourself or want to get help from an advisor, it is important to find out more about the different types of mortgage loans.
Fixed Rate Mortgages
Fixed rate mortgages have a duration of 5, 10, 15, 20 or 30 years. The interest rate is set when you are approved and the payments will always be the same. This type of mortgage is a good option if the credit market currently has affordable rates. The first payments will be applied towards paying off the interests, so it will be a while before you start building equity in your home. A fixed rate mortgage is a good choice if you want a financing option with predictable payments. The other advantage is that it is very easy to shop around and compare rates for this type of mortgage.
Adjustable Rate Mortgages
An adjustable rate mortgage has an interest rate that changes from one year to the next. The interest rate is calculated each year to reflect what borrowing currently costs. There are limits on how much you can be charged for interests. Adjustable rate mortgages are one of the most popular financing options for homeowners. The downside of adjustable rate mortgages is that it is difficult to predict what the interest rate will be like in ten years from now.
Hybrid mortgages are a cross between fixed and adjustable rate mortgages. Depending on the hybrid mortgage you apply for, the interest rate could be fixed for 5, 10 or 15 years. The interest rate will then become adjustable and change every year. The initial fixed interest rate is typically lower than the rate that would be applied to a fixed rate mortgage, which makes hybrid mortgages an attractive option.
Graduated Payment Mortgages
The interest rate of a graduated payment mortgage is fixed but the amount of the payment will increase over time. Graduated payment mortgages are a popular option among young couples who can initially afford low payments but who will be able to make larger payments once they find a career.
Balloon Payment Mortgages
You can find balloon payment mortgages with fixed and with adjustable interest rates. These loans never fully mature and a large sum will be due after 10, 15 or 30 years. If you cannot afford to make this balloon payment, you have the option of resetting the mortgage. If you choose to reset the mortgage instead of making the balloon payment, new rates will apply.
There are other types of mortgage loans available but these are the most popular ones. Weigh the pros and cons of each option to determine which type of loan is best suited for your budget and your situation. Keep in mind that you can always choose to refinance your mortgage later down the road if you feel that you are paying too much.