TYPE
|
DEFINITION
|
ADVANTAGES
|
DRAWBACKS
|
COMMENTS
|
30-YEAR
FIXED RATE
|
A long-term loan in which principal and interest
are amortized over 30 years; both interest rate and amount of
monthly payment remain unchanged for life of the loan. |
-Considerable tax benefits, especially in early
years.
-Payments never rise, regardless of inflation. |
- Slow equity build-up. |
The most common mortgage in the U.S., a particularly
good investment when rates are low. |
15-YEAR
FIXED RATE
|
As above but payback period is 15 years. |
- Usually lower interest rate than 30-year.
-Faster equity build-up.
-Less interest paid out over life of loan. |
- Higher monthly payments.
-Less tax-deductible interest. |
An excellent option for middle aged and older buyers. |
ARM
(Adjustable
Rate Mortgage)
|
A mortgage whose rate changes over time according
to terms specified by the lender, usually according to short-term
Treasury Bill rates. |
-Low initial interest rate, sometimes below market.
-Payments may decrease over time. |
-Payments may increase over time.
-Risky if rates rise significantly. |
Good option for buyers whose income will rise and/or
when rates are expected to drop. |
FHA/VA
MORTGAGE
LOANS
|
Government-insured or guaranteed mortgages that
can make purchase more affordable than conventional loans. |
-Little or no down payment required.
-Marginally better rate than conventional 30-year mortgages. |
- Lower limits on the maximum that can be borrowed.
-VA requires current or past military service. |
Good option for first time buyers with little to
invest in a down payment. |
GPM
(Graduated
Payment
Mortgage)
|
A fixed rate mortgage offering low initial monthly
payments that increase by a pre-determined amount, then level
off after about five years. |
-More affordable payments for first few years.
-Unlike ARMs, buyer knows upfront how much payments will rise
in future. |
-Slower equity build-up.
-Buyer's income may not rise in proportion to payments. |
Another good choice for buyers who expect income
to rise substantially after home is purchased. |
BALLOON
MORTGAGE
|
A short-term (3-5 years) loan, usually at a fixed
rate, paid back in equal monthly payments and a final "balloon"
payment for the remaining balance. |
-Lower monthly payments.
-Full tax benefits. |
-Little or no equity build-up; monthly payments
are often for interest only.
-Balloon payment usually requires refinancing or selling the house. |
Designed for buyers who plan on moving within a
few years and/or are confident in the short-term appreciation
of a property. |
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