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When you are ready to buy a home, you want to get the best mortgage possible for your needs. Here are the most common types of home loans and the major pros and cons of each.
30-Year Fixed Mortgage
Pros: 30-year fixed mortgages offer affordable monthly payments that won’t change over the life of the loan. They can normally be obtained with a small down payment.
Cons: The length of the loan is the big drawback of a 30-year fixed mortgage. This means that interest accrues over a long period of time and can mean thousands of extra dollars paid over the life of the loan. The interest rate could also be higher on these longer loans than on those with 15-year terms.
15-Year Fixed Mortgage
Pros: The shorter term of the loan means that less interest is paid and the loan will paid off in half the time of a 30-year fixed mortgage. As is the case with the 30-year-mortgage, the interest rate is fixed over the life of the loan and can be lower than those on longer loans.
Cons: Not everyone can qualify for a 15-year loan and many cannot afford the larger payments that come with the shorter term.
Adjustable Rate Mortgage
Pros: Adjustable rate mortgages (ARMs) feature interest rates that are favorable at the time they are obtained, but that will fluctuate with the market. If the market stays favorable, you can save some money on interest. If the interest rate drops during your loan period, you will benefit from the cost savings. You also have the option to convert your ARM into a fixed loan by refinancing should the market take a turn for the worse.
Cons: Those who get ARMs are taking a chance that the interest rate will not increase while they have the loan. If it does, they will be subject to larger payments they may not have budgeted for. ARMs may also tend to have pre-payment penalties that may not exist with fixed-rate mortgages.
Balloon Payment Mortgage
Pros: Balloon mortgages are similar to traditional loans, with low, fixed monthly payments due for a certain amount of time, but then require the balance of the loan be paid in full at a specified time. Balloon mortgages tend to have lower interest rates and could be good for those who plan to sell the home or for those whose financial situation could significantly improve before the balloon payment is due.
Cons: Home buyers can run into trouble if their plans change and they find themselves still in the home when the balloon payment is due. If they cannot afford to pay it off, they will need to refinance the loan and, if the home has not appreciated in value, it could cause big problems.
When looking for a home, it’s always a good idea to work with a mortgage professional who can pre-qualify you for a loan and help you choose the best one for your needs. Mortgage Investors Group is the #1 residential mortgage lender in Tennessee. View more information about our different types of loans here.
