Compare Mortgages -
First Time Homebuyers Choose Between Adjustable Rate Fixed Rate and
Interest Only Loans
June 28th 2006
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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.
Dan Wilson
Best Syndication
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