| 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 the
life of the loan. |
- Considerable tax benefits, especially in the early years.
- Payments never rise, regardless of inflation.
|
|
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.
- Less interest paid out over life of loan.
|
- 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 final "balloon" payment for the remaining balance. |
|
- Little or no equity build-up; monthly payments are often
for interest only.
- Balloon payment usually requires refinancing or selling
of 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. |
