An Overview of Mortgages

Mortgages have been much in the news with the vilification of the ARM (adjustable rate mortgage) and the foreclosure crisis. To make a good choice of mortgage, you must have a good working knowledge of different mortgage types. The amount you end up paying for your home is dependent on the choices you make when you first buy it. There are a number of mortgage types, but the following will give you an idea of the variety of loans available.

Fixed rate mortgages are what most people think of as the standard mortgage. For the life of the loan, there is a fixed rate of interest and your mortgage payments never change. For many people, this is the safest and overall cheapest type of mortgage, as it does not require constant monitoring of rates.

An adjustable rate mortgage (ARM) usually starts at a lower interest rate, but fluctuates with the market. This is the mortgage that has been associated with the foreclosure crisis, but it in itself is not a bad thing. For people who expect their income to increase over the years, this can be a way to get the home they want now and pay for it later. Unfortunately, many people have gotten these mortgages and ended up defaulting when the interest soared.

A balloon mortgage is for people who only expect to live in their home for a relatively short period of time, say five years. The interest rate is low then but is due at the end of the time. If a homeowner is "caught" - either because they are unable to sell or circumstances force them to remain, they will have to find another mortgage. 

Interest-only mortgages have a time-limited option to pay only the interest of a loan. This can be beneficial to first-time home owners. The option to pay the interest instead of the interest and principal can be a welcome relief during the first years of home ownership.

Combo/piggyback loans are where you take on two mortgages to avoid paying mortgage insurance when you don't have enough money for a 20% down payment. Sometimes the amount of two mortgages can be less than the private insurance and thus the home owner can save more money. However, one must be careful to keep track of the two separate loans.

Mortgage buydowns allow the homeowner to offer a payment on the interest, essentially prepaying some of it and resulting in lower monthly payments.

Any of these mortgages can be a good choice with a careful assessment of one's financial situation. It is advisable to consult with a mortgage professional to determine the best mortgage for you. While none of the above are "the best" or evil, nasty and bad, but there will always be a loan that is best for your situation.

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