Interest Rate Comparisons for Types of Home Mortgages
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by: marciafreeman
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A wide range of home mortgages is available to buyers. Even first time buyers can find a mortgage tailored to their needs. To select the right home mortgage for you, you need to know what types of loans are available. This guide outlines the most common types available to you today.
The interest rate on an adjustable rate mortgage (ARM) rises and falls as the economy changes. Your home mortgages interest rate rises if the prime interest rate rises, and falls if the prime interest rate falls. This allows you to take advantage of periods of low interest, but also exposes you to the risk that the prime interest rate will rise sharply, hiking your interest rate and payments with it. Because you, not the bank, absorb the risk of rising or falling prime interest rates, banks set the introductory interest for adjustable rate mortgage loans lower than those for fixed rate mortgages.
The interest rate on a fixed rate home mortgage is set, or fixed, for the term of the loan. This protects you from the risk that interest rates will rise, but it also keeps you from getting any benefit if interest rates fall. Banks assume that at least once, the prime interest rate will spike above the interest rate of your fixed rate mortgage and the bank will have to pay the difference itself. To cover for this eventuality, banks set the interest for fixed rate mortgage loans higher than that for adjustable rate mortgages.
A convertible home mortgage loan begins as an adjustable rate loan, but you have a period of time during which you are allowed to convert to a fixed rate. If interest rates are high but you expect them to drop shortly, this is a good loan type to choose. You can take advantage of the lower interest rate of an adjustable rate home mortgage when interest rates are high, then lock in a better interest rate for the life of the loan as soon as rates drop.
A balloon home mortgage begins with an introductory period during which you pay a fixed rate, but rather than paying the usual high interest rate for a fixed rate loan, you pay an interest rate almost as low as that for an adjustable rate mortgage loan. However, when the introductory period ends, you owe the total unpaid balance of the loan. Balloon loans are excellent for people who intend to renovate and resell a property before the introductory period ends, or who foresee being able to refinance at favorable rates within the next few years. Links to more Mortgage loan | Refinance rates | Equity loans | Refinance home loan |
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