The Four Most Common Types of Home Mortgages

A wide range of home mortgages is available to buyers. Even for first time buyers, it is possible to find a mortgage tailored to your needs. However, to pick the right type of home mortgage for you, you need to know what your loan options are. This guide outlines the most common types available to you today.
The interest rate on an adjustable rate mortgage (ARM) lowers and rises in tandem with fluctuations in the state of the economy. When the prime interest rate goes up or down, your home mortgages interest rate goes up or down too. This lets you get the maximum benefit from periods of low interest, but also means that if the prime interest rate rises sharply, your interest rate and monthly payments will rise with it. Because you, not the bank, absorb the risk of rising or falling prime interest rates, banks set the introductory interest for adjustable rate mortgage loans lower than those for fixed rate mortgages.
The interest rate on a fixed rate home mortgage does not change over the term of the loan; it is set, or fixed. This protects you from the risk that interest rates will rise, but it also keeps you from getting any benefit if interest rates fall. Banks assume that at least once, the prime interest rate will spike above the interest rate of your fixed rate mortgage and the bank will have to pay the difference itself. Banks offer higher interest rates for fixed rate mortgage loans than for adjustable rate mortgages to cover for this eventuality.
A convertible home mortgage loan is initially an adjustable rate loan, but you may convert to a fixed rate at any time during a set period in the duration of the loan. This is a good type of loan to choose if interest rates are high but are expected to drop. You can enjoy the comparatively low interest rate of an adjustable rate home mortgage, then lock in an attractively low fixed rate for the rest of the life of the loan.
A balloon home mortgage begins with an unusual introductory period during with you pay a fixed rate that is almost as low as that for an adjustable rate mortgage loan, instead of paying the higher interest rate of a normal fixed rate loan. However, at the close of the introductory period, you owe the entire remaining balance of the loan immediately. Balloon loans are ideal for real estate investors who plan to resell the property before the end of the introductory period, or for homeowners who plan to refinance within the next few years.