Buying a house is a big deal, and the more you know about the whole process, the better off you’ll be. With that said, there are three major types of mortgage loans for homebuyers: fixed-interest mortgages, adjustable-rate mortgages and interest-only loans.
Fixed-Interest Mortgages
A fixed-interest mortgage is money from a lender that keeps the same interest during the life of the loan. You don’t have to worry about your interest rate fluctuating, because the contract guarantees it will stay the same. The lender splits the total cost of interest into equal monthly payments for the entire loan term.
The interest payments are larger during the first few years of the loan; only a small percentage of each payment during that time goes toward the principal.
Adjustable-Rate Mortgages
Adjustable-rate mortgages, or ARMs, feature changing interest rates. For some buyers, an adjustable-rate mortgage is the right choice. Typically, the law requires a cap that prevents the interest from getting too high over the term of the loan.
Interest-Only Mortgages
Interest-only loans are structured like adjustable-rate mortgages, but for the first few years, you’ll only be paying interest on the money. No money will go toward your principal. The payments will be lower than they would be with a conventional mortgage, but you won’t be working toward owning the house; instead, you’ll be paying the bank for allowing you to use their money.
One thing to remember about interest-only loans is that your payment will probably increase significantly once the interest-only period is over.
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