Thursday, October 29, 2009
Types of Mortgages
By Shawn Chandok
One of the most important decisions we will make in our lives is to buy a house. When financing for a house there are many options we can choose however the most common will include some type of mortgage. So what are some types of mortgages that might seem favorable? One type is called an adjustable rate mortgage. This mortgage seems attractive at first because of its low interest rate. A lower interest rate qualifies you for a lower payment per month which will save you money. However, a major disadvantage to adjustable rate mortgages is that it transfers all the risk to the borrower. Since adjustable rate mortgages follow a specific index, it the market rates increase so does the amount you pay per month. Personally, I would not choose an adjustable rate mortgage (arm) however it can be very useful to someone who plans to purchase a house during a housing bubble (some argue such as now) and sell it in a couple of years for a quick buck.
Another type of mortgage is a fixed rate mortgage, which as the name suggests gives you a fixed interest rate per month. This means all your monthly payments will be the same. I personally like FRMs better because they transfer all the risk to the borrower. For example, supposing you have a 5% monthly interest loan and the market spikes causing an average of 7%. In this scenario your FRM seems very favorable. However, supposing the market goes sour and offers 3%, you might consider refinancing.
Last but not least, another type of mortgage is a graduated payment mortgage (GPM). These type of mortgages appeal to college graduates because the initial interest rate is very low. However, the interest rate spikes up as your income increases. So my advice for GPM’s would be, if you are signing one make sure you sign for a short period of time where you don’t except your income to skyrocket too much (Example: 5 year loan out of college).