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The Two
Basic Types of Mortgages |
Once you know some of the basics
about mortgages, you can more closely examine the different
types. You should familiarize yourself with two basic kinds
of mortgages before we get to some of the more exotic variations.
Fixed-Rate Mortgage
This is the plain-vanilla loan that most people think of when
considering a mortgage. You will owe a certain percentage
of the loan as interest to the lender. This amount never changes,
and your monthly payment will remain the same over the life
of your loan. Fixed-rate mortgages are usually for 15 or 30
years.
ARM
No, not the thing hanging from your shoulder. This is an "adjustable-rate
mortgage." The interest rate changes to reflect changes
in the credit market out in the great, wide world.
The first-year rate (otherwise known as the teaser rate) is
generally a couple of percentage points below the market rate.
There are also upward limits, above which the interest rate
isn't allowed to go -- this is called the cap. If your teaser
rate is 4%, and you have a five-point cap, then the highest
that your interest rate can go is 9%.
What's more, the amount that the interest rate can rise each
year is limited, usually to one or two percentage points per
year. The frequency at which the rate adjusts might vary;
make sure you know these features.
If you're considering an ARM, think about the worst-case scenario.
What if interest rates go up, and your ARM adjusts to its
maximum? What will that maximum be, and when will it kick
in? Will you be able to afford the payments?
And that, folks, is it: the two major types of loans. |
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