There are
several different types of mortgages. The most common are
the Fixed Rate Mortgage (FRM) and the Adjustable Rate
Mortgage (ARM). The most common mortgage sought by first
time home buyers is a Fixed Rate, 30 year mortgage. To help
you understand each type of mortgage, we've given a brief
explanation for comparison below.
Fixed Rate - 30 Years
This is the most commonly used mortgage plan. Your monthly
payments are lower than they would be on a shorter (15 year
FRM) term loan. The interest rate is locked in when you
secure the mortgage and does not change over the life of the
loan.
Advantages:
Fixed monthly payments over the life of the mortgage.
Longer life, lower payments.
Fixed interest rate over the life of the mortgage.
Can refinance if rates go down
Disadvantages:
Interest rate higher than 15 year FRM and VRM.
Interest rate does not change if rates go down.
Total interest paid over the life of the loan is much higher
than a shorter term mortgage.
Fixed Rate - 15 Years
Also becoming very common, the 15 year mortgage results in
higher monthly payments, but a lower interest rate.
Advantages:
Fixed monthly payments over the life of the mortgage.
Fixed interest rate over the life of the mortgage.
Total interest paid over the life of the mortgage is much
lower than that of a 30 year FRM.
Disadvantages:
Shorter life, higher payments.
Interest rate does not change if rates go down.
Smaller tax deduction because less interest is paid.
Adjustable Rate Mortgage
An adjustable rate mortgage has a fixed interest rate at the
time the mortgage is secured. At the start of the loan, the
payment is also fixed. Neither the interest rate, nor the
payment are fixed for the life of the mortgage, however.
After the initial fixed period, both the interest rate and
the monthly payments are adjusted to reflect the then
current market interest rates. The calculations to determine
the adjustment is at the discretion of the lender, each
using their own formula and index.
Advantages:
Lower monthly payment at the beginning of the loan.
Rates and payments may go down if rates go down.
A borrower may qualify for a larger loan.
Disadvantages:
Higher risk.
Payments may rise as rates rise.
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