As its' name suggests, a fixed-rate mortgage is the most stable loan. It offers a fixed interest rate for the entire length of the loan regardless of any economic fluctuations. This is the major benefit of a fixed-rate loan.
Conversely, the pros of a fixed-rate loan are (sometimes) outweighed by the cons because this type of loan is most likely to have a higher interest rate than most any other loan.
However, many people prefer the stability and predictability of a fixed-rate loan, and are willing to pay the price for this "peace of mind." Also, these rates can vary greatly among lenders, and depend mostly upon personal factors -- like a credit score.
I would recommend this type of loan for someone who has great-excellent credit, collateral, and particularly for someone looking to stay in their home for a long period of time.
Adjustable Rate Mortgage:
Generally referred to as an "ARM," this is also very much like its' name in that the interest rate of the mortgage will change over time. Each loan is different, but there is generally a period of time (generally 5 or 7 years) during which the interest rate will stay the same. After this time, the interest rate will be re-adjusted (usually) once a year. The differences in these loans are marked by the varying introductory period during which the rate does not change, and second, how often the rate will be changed.
Another variable in these loans is the "caps" put on the interest rate. Generally, there is an annual (or periodic) "cap," that stops the loan from going over a certain amount each time it's adjusted, and there can also be a lifetime cap on the entire amount of the loan.
While this might sounds like a risky game, it can be surprisingly beneficial. It often means a lower interest rate during the introductory period, and sometimes, for instance, over the last 7 or 8 years, because of the economy's down-turn, many ARM interest rates have gone down. At the same time, of course, if the economic climate were to change in the other direction, the rate would be most likely to rise.
Because of the savings during the initial period of the loan, I would recommend this type of loan to someone planning not to stay in a house for the entire length of their loan. Also, if you have a job or are in some way directly effected by certain economic conditions, this might make sense for you.
Interest Only Loans:
For the risk-takers out there... this is the loan for you! An interest only loan, again, like it sounds, means that, well, in the beginning, you will be paying only the interest on the loan. So, this means the initial payments will be lower than probably any other type of loan. It's very similar to an ARM loan, except that the transition from your "introductory period" to your "adjustable period" might hurt a little.
While it does afford many people the option of owning a home maybe sooner than they otherwise would be, it can mean a significant increase later down the line. So while you might save a good deal of money initially, none of the initial payments go toward the actual principal of the loan.
This is a great loan for someone who does not have a lot of income currently, but plans to have some in the future. For instance, if you are on a career track where you know you will be making more money in X amount of years, but are not yet. Or if you want to free up some cash for other investments... this is also a good choice. Also, another good loan for someone not planning to stay long in the house they are purchasing, or for someone planning to "flip" a house and make a profit.
Anne Morgan Pates
Anne Morgan Pates has worked in Real Estate and in Sales & Marketing since 2012. She currently runs her own Marketing business, FXBG Real Estate &.Small Business Marketing.