Loan Type
|
Advantages
|
Disadvantages
|
30-year fixed
|
Lower monthly payment
Most affordable
More cash/savings because payment is lower;
easier to bear if the homeowner has repairs to make
or comes upon hard times; extra cash allows
homeowner to make other investments since cash
isn’t tied up in the mortgage
|
- Longer term
- Pay more interest
Costs more than shorter term mortgages over
the life of the loan
|
15-year fixed
|
Shorter term, own your home in half the time
(allows you to own your home before your children
start college or before you reach retirement)
Often the total interest paid over the life of the
loan is lower, less than half the total interest of a 30
yr
|
Bigger monthly payment
Qualification may be difficult because the
income requirement is higher
|
Adjustable Rate
(ARM)
|
When interest rates go down, payment goes down
Initial interest rate can be as much as 2 to 3
percent lower than a comparable fixed rate mortgage
Homeownership is more affordable
Qualifying is easier
Lower initial interest rate compared to fixed-rate
mortgages, which can make homeownership more
affordable and make qualifying for a mortgage
easier. And if interest rates decline, your mortgage
payments decline as well.
|
When interest rates go up, payments go up
The potential for higher monthly payments if
interest rates increase
Requires more budgeting discipline
|
Interest-only
Loan
|
Allows you to get a bigger loan and more house
For home buyers who receive the bulk of their
income in bonuses
Good for people who expect to increase their
income quickly
Also good for people who plan to move before
principal comes due and for those who reasonably
expect their incomes to rise strongly over time
|
Must budget wisely and make lump sum
payments, steering clear of using that money for
other purposes except to strong investments
At end of the fixed period, you must refinance,
pay a lump sum, or start paying on the principal
If house doesn’t appreciate, you may owe
money when selling
When paying only the interest, the principal
does not decrease and you do not build equity
unless the home appreciates in value
|
Low/No
Document Loan
|
Designed for those who have trouble verifying
all of their income such as self-employed borrowers,
commissioned professionals, or service industry
professionals (e.g.; bartenders, waitresses, hair
stylists)
Lender does not require proof of income and
assets
No ratios (debt to income, housing to income)
|
Higher interest rate because of higher risk
Bigger down payment required
Higher credit standards
|
Balloon
Mortgage
|
A good choice for those who don't expect to
own their home past the maturity date when the
balloon payment is due
Short-term loan with equal payments
Payments are usually lower than conventional
fixed loans
Good choice if home is expected to appreciate
Lower interest rate then long term loan
|
At the end of a few years, you must sell your
house or refinance because all remaining principal
is due
If you need to refinance, interest rates may be
much higher than when you got the balloon loan
May end up owing remaining principal plus
additional settlement costs if the house doesn't
appreciate
|
