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Mortgage Types
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Mortgage Types

Types of Mortgages The term "mortgage" is just a different word for "loan". Itís used in the context of buying real estate. There are numerous types of mortgages, however, and itís important to understand the difference between them. The two most common types are Adjustable-Rate Mortgages (ARMs) and Fixed-Rate Mortgages.

With an ARM, the interest rate on your loan can rise or fall depending on what happens in the U.S. economy. Because the interest rate is variable, there is an element of risk involved; you could start out with a low interest rate one year only to find yourself paying higher rates a few years later. If the rates increase, your monthly house payments will also go up. If they go up a lot, you could find yourself unable to make your payments.

Historically, home buyers have found that when interest rates increase, itís only temporary. But history is not always an indication of what will happen in the future. With this type of mortgage, you need to find out how often a new interest rate will be applied to your loan. Some might change every six months while others will change only every three years.

With a fixed-rate mortgage, you can be sure that your house payment will always be the same for as long as you hold the loan. There are no surprises with a fixed-rate mortgage. The U.S. economy could cause rollercoaster interest rates, but youíre rates and payments will be as level as Kansas. The advantage of this approach is that you always know what to expect and therefore how to plan. The downside is that interest rates could fall below your rate and you will find yourself paying more interest than your neighbor who selected an ARM.

You will need to consider what is happening in the U.S. economy before making a decision. For example, if interest rates are extremely low, it might be better to lock into a fixed-rate mortgage. This way you guarantee a low rate over the course of your loan.

Regardless of what type of mortgage you select, you will also need to decide how long to extend your loan. Lenders can adjust the length of your loan according to the amount you can afford for a monthly payment. A typical time-frame to pay off a mortgage in the U.S. is 30 years. But it is usually advantageous to pay higher monthly payments in order to get out of debt sooner. This way you pay far less interest. Many people prefer to select a 30-year loan and then pay double monthly payments when they are able. If hard times come, they can always pay the minimum amount required. Paying your loan quickly can save tens of thousands of dollars. And once the house is paid for, youíre free to invest in other areas.


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Mortgage Types