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Many people look for a mortgage with payments that will remain essentially the same over it's entire term. For these people, a fixed-rate mortgage would work the best.
Fixed-rate mortgages can remain essentially unchanged throughout the term because the monthly principal and interest payments are agreed upon from the outset. The interest rate that you close with, will remain your interest rate for the whole term, or until you refinance. A fixed-rate mortgage is probably the most stable choice and makes future planning very easy.
You've heard the pros, now here's a con: In certain types of economies, interest rates for a fixed-rate mortgage can be considerably higher than the initial interest rate of some of the other mortgage options. So even though you are protected from rising interest rates, you'll miss out on falling interest rates. However, if interest rates drop significantly, you can always refinance.
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Adjustable-Rate Mortgages (ARMs)
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Another option you have is an adjustable-rate mortgage (ARM). These mortgages work best when you're buying a home during high interest rates, if you expect an increase in your income, or if you don't plan on living in your home very long.
With an ARM, your mortgage rate rises and falls with the interest rates. Your rate will consist of your lender's index plus a margin, usually two or three points. You do have protection from rising interest rates, though. Your ARM will be given a "cap". "Caps" limit the amount your lender can raise your interest rate each year, and over the entire term of the loan. So be sure to ask about the "cap" details that apply with any ARM you might be considering.
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Want the best of both worlds? The convertible ARM is a combination of the fixed-rate mortgage and the adjustable-rate mortgage.
With a convertible ARM, you start out with an ARM mortgage, and then have the ability to convert to a fixed-rate mortgage after a set period of time. For an example, you could get a one-year ARM with the option to convert any time after the first through the fifth adjustment period. That's why these mortgages have become very popular recently.
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Balloon mortgages are also very popular because your monthly payments are generally lower than they would be in a traditional 30-year fixed-rate mortgage. These mortgages are typically five to seven years, and at the end you are required to payoff the remainder of the mortgage in full.
So if you are planning on only living in your home for five to seven years, a balloon mortgage might be the right one for you. Interest rates are sometimes three-eighths to three-quarters of a percentage point less than the traditional fixed-rate loans. If your plans change, and you end up staying in your home longer than five to seven years, you'll have to pay the remaining balance or more likely, refinance your mortgage.
Qualifications for a balloon mortgage vary depending on the lender you choose, but most require at least a 20% down payment.
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FHA & VA Loans (also known as Government Loans)
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Are you a veteran? You may qualify for a Veterans Administration mortgage. There are caps on the size of a VA loan you can get, but this loan could be ideal for buying a lower priced home with a small down payment.
There are also loans out there for Americans with smaller incomes. Many times making it possible to purchase a modestly priced home with no or little down payment.
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