The home buying process is both stressful and rewarding. Purchasing a home is a major life goal for many people, and provides security and stability for the homeowner. However, homes are generally quite expensive compared to average salary; prospective buyers obtain loans from banks to spread the cost of the home over a fixed period of time.
Mortgages can come in many different forms. The mortgage value (amount owed) is dictated by the price of the property and the down payment, and can be fixed rate or adjustable. Let’s dive into some common mortgage packages in the United States.
Fixed Rate Mortgage
This is the most common form of mortgage used in residential real estate and personal home ownership. The fixed rate refers to the interest rate- usually around 3-5%- that is locked in at the time of purchase. This means that the rate won’t increase over time, and the mortgage costs can be predicted many years out. These mortgages usually come in 30-year packages, though 10 and 15 year mortgages are not entirely uncommon.
Adjustable Rate Mortgage
The adjustable rate mortgage, known as an ARM, is a mortgage on a fixed price with an adjustable rate of interest. This can be tied to the market as a whole or to other external pacesetters. The ARM can offer the buyer the opportunity to place their payment concentration at different points through the life of the loan.
The balloon mortgage is a unique type of loan. With a balloon mortgage, most of the principal is repaid at the end of the loan, which is usually five to seven years in length. The monthly payments, if any, are usually interest-only, and the vast majority of the loan is paid in a lump sum. Balloon mortgages are far more common in commercial real estate transactions.
SmartLifestyleTrends is not a fiduciary and this article does not constitute financial advice. For mortgage guidance, please consult a real estate professional or mortgage broker.