Mortgages are a major financial commitment, so it’s important to understand the different types and their associated pros and cons before you make a decision. There are several mortgage types available, each with their own set of advantages and disadvantages.
Fixed-rate mortgages are the most common type of mortgage and the one most people are familiar with. With a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan. This means your monthly payments will remain the same, regardless of market fluctuations. The major benefit of a fixed-rate mortgage is that you can budget for your monthly payments and have some assurance that they won’t change. The downside is that if interest rates go down, you won’t benefit from the lower rate.
Adjustable-rate mortgages (ARMs) are another type of mortgage. ARMs come with an initial interest rate that is fixed for a certain period of time, usually 5 or 7 years. After that period, the interest rate can change each year based on market fluctuations. This can be beneficial if interest rates go down, but it also means your monthly payments can increase if rates go up. While an ARM may be a good option if you plan to move in the near future, they can be risky if you plan to stay in your home for a long time.
A third type of mortgage is an interest-only mortgage. With an interest-only mortgage, you pay only the interest each month and no principal. This can help keep your monthly payments low, but it means you are not building equity in your home. At the end of the loan term, you will owe the full balance of the loan.
Finally, there are also hybrid mortgages, which are essentially a combination of two or more types of mortgages. For example, a 5/1 ARM is a hybrid mortgage that has a fixed rate for the first 5 years and then an adjustable rate for the remaining term.
No matter which type of mortgage you choose, it’s important to understand the pros and cons before making a decision. Be sure to weigh all your options and talk to a financial advisor or mortgage lender to get the best advice.