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Compare Mortgages - First Time Homebuyers Choose Between Adjustable Rate Fixed Rate and Interest Only Loans

June 28th 2006

Compare Mortgages - First Time Homebuyers Choose Between Adjustable Rate Fixed Rate and Interest Only Loans


There are many types of home loans (mortgages) available including fixed rate, interest only and adjustable rate mortgages.  Typically they are affixed to real property and improvements (a house), but can be associated with ships, and raw land. 

Each loan has its advantages.  Adjustable Rate Mortgages (ARMs) give the lender some safety if interest rates rise.  For instance, if the interest rate right now is 5% but 5 years from now increased to 10%, the lender can raise their rate to 10%. Usually the rate is associated with an index such as the Prime Interest Rate plus a percentage.


If you had a fixed rate mortgage (FRM) and rates increased, you would not pay any more in interest.  In other words, the rate would remain at 5%. If interest rates are high, many borrowers prefer ARM. They would like to capitalize on lower rates when they become available without having to refinance.

Another benefit to adjustable rate mortgages is the low initial payments, making it easier to qualify. With ARMS the interest rate may be fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to the specified market index.

ARMs are easier to obtain because the transfer part of the interest rate risk from the lender to the borrower, and thus are widely used.  The initial interest rate is usually lower than what you can get with a fixed rate mortgage (0.5% to 2% lower).


Interest Only (IO) loans have become very popular lately.  These loans can be practical if you are planning on selling your home within the next 10 years. The payments will typically be lower than fixed rate mortgage (FRM), but the loans may include a balloon payment at the end of the term.  In other words, if you take a loan out for $40,000, you may pay interest only for ten years, but after ten years the loan may be due in full.

Borrowers using IO loans may increase their purchasing power with affordable monthly payment, less money down, and an increased cash flow.  They may still enjoy the mortgage interest tax deductions benefits.  According to one IO Loan broker, IO loans are one of the fastest growing products in the mortgage and real estate markets.  Always consult with loan professionals and financial planners before making your decision.       

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Dan Wilson
Best Syndication

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