The vast majority of those who buy a residence, at least to some extent, use some type of financing vehicle or mortgage. These can be classified into two basic categories, either compliant or non-compliant. For the most part, this refers to the amount being funded and may differ a bit from time to time and from one geographic area to another location. Once you decide to take out a mortgage and the lender qualifies you, you must determine which of the 3 basic types of mortgages to choose: 1) fixed; 2) adjustable; or 3) balloon.

1. Fixed mortgage: Also known as a fixed term, the most popular duration of these is the monthly payment of 360 or 30 years. However, they are also available in a variety of other lengths, including: 15 years; 20 years; 25 years; and 40 years, as well as other terms. Obviously, the advantage of this type of financing is that you are secure in the principal and interest components, every month, for the life of the loan, which is often reassuring because it provides a degree of peace of mind. Remember, though, that your real estate taxes and your other escrow items (like insurance), as well as your utilities, etc., generally to varyand often increase over time. To qualify for these, in addition to having the necessary credit score, etc., one must have the correct ratio of income to monthly payments, etc. Since at certain times, especially when interest rates are higher than they are today, this relationship becomes a challenge for many potential home buyers, etc.

2. Adjustable – rate: When interest rates are higher, they generally come with a lower introductory rate, which means lower payments. Loans are also known as ARM, And that rate is guaranteed for a specific period of time, and then it changes. The new rate is generally based on some type of index, such as SALARY READJUSTMENT, or types of Treasury bills, etc. For example, if you had a 30-year / 5-year rate, it would mean that the rate was guaranteed for 5 years, and then the index would dictate the new rate, after that. There may or may not be a limit, which would mean a limit on how much you could increase or decrease. Obviously, the advantage of this is the considerably lower rate, sometimes, for the initial period, as well as the lock – in financing for a longer period – (although at a different rate). This could allow someone with a lower income to qualify for a larger mortgage, because the relationship between their monthly income and the mortgage payment could be more favorable to the borrower. The downside is that, at the end of the initial term, there is a risk of a rate increase or the need to try to refinance.

3. Balloon: These types of mortgages are offered less frequently. They have interest-only payments for a specific period or significantly lower payments for that introductory period. At the end of the period, the borrower must repay the entire loan or refinance. It’s pretty obvious what the positive and negative possibilities are!

The more a potential buyer knows, the better off. Hopefully, this brief discussion could contribute to the buyer’s comfort, safety, and ability to make the best decision for them.