Understanding Interest Rate Variables when Buying your First Home

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If you are in the process of buying a home then you have probably heard your share of the mortgage, finance, and real estate lingo.   It’s important to understand this so that you make an informed decision and not just rely on the professionals you are working with. Doing so can help you save money and be confident in the decisions that you are making.  One important thing to understand is the different types of mortgages you can get. We have summarized three of the most popular types of mortgages.

 

Fixed Rate Mortgage

Some times called a “30 year fixed” or “15 year fixed” or “FRM”  this kind of mortgage is traditional and popular. This is when the interest rate on the mortgage remains the same through the term of the loan. This is a pretty simple and straightforward kind of loan similar to most traditional car loans, this usually means your mortgage payment is the same throughout the life of the loan.  

 

Adjustable Rate Mortgage (ARM)

This kind of mortgage is sometimes called “variable-rate mortgage.” With the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. This loan is a little more complicated as changes in the market can make an interest rate increase or decrease, this means that mortgage payments may fluctuate throughout the term of the loan.  Often, there is a period of fixed interest at the beginning of the loan (5 years, for example), then it will become variable after that.

 

Balloon Mortgage

This kind of mortgage is usually rather short, with terms as low as 5 years, but the payment is based on a term of 30 years. They often have a lower interest rate, and it is sometimes easier to qualify for than a traditional 30-year-fixed mortgage. However, with this kind of loan, the APR is usually very low because at the end of the term you pay the remaining amount due on the loan.

Buying a home is going to be one of the biggest, most important decisions you will make in your life. And as you can see, it’s not something you can easily jump into.  If you have questions about mortgages or want to learn more, please contact us.  We are here to help you on your financial journey.

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