Fixed-Rate Mortgages (FRM)
The benefit of a fixed rate mortgage is that the rate of interest remains the same for the life of the loan.

• Advantages These are the most popular types of mortgages as well as the most predictable. The rate you agree to at the beginning of the mortgage is locked in for the life of the mortgage. Your monthly payments are predictable, which helps you budget for the long-term. If you get a fixed-rate mortgage when rates are high, you can always refinance when rates drop.



• Disadvantages Interest rates on fixed-rate loans are higher than other types of mortgages, so your monthly payments are higher. If interest rates drop and you want to refinance, you must pay closing costs to do so.



• Who should consider an FRM? If you want a predictable monthly payment and plan to live in the property for more than 10 years, this is a good choice of mortgages.

Adjustable-Rate Mortgages (ARM)
In an adjustable-rate mortgage, the interest rate can move up or down to match current market interest rates. There is usually an introductory discounted rate, lower than fixed rates. Depending on the type of ARM, the first adjustment period can last for a period of one, three, five, seven, or 10 years before a change in rates occurs. Most ARMs adjust every year until the loan is fully paid. When you consider an adjustable rate mortgage, be certain you know how much the rate can go up in the first adjustment, how much the rate can go up over the life of the loan, and whether or not it can be converted to an FRM.

• Advantages The low interest rate and low monthly mortgage payments during the early years of the loan are very attractive. If interest rates go down, your rate and payment also go down. With an ARM, you often qualify for a higher loan amount.



• Disadvantages There is certainly more risk involved with an ARM. You should expect that your payments will go up over time and should develop long-term budgeting goals accordingly.



• Who should consider an ARM? If you anticipate an increase in your income, it will help cover the potential increase in the rate and your monthly payments. An ARM is a good idea if you plan to sell your home before the first rate adjustment. Are you willing to gamble on the rates being low when the first adjustment occurs? If so, you can convert to an FRM at an affordable rate.

Interest-Only Mortgages
In an interest-only mortgage, the borrower only pays interest (plus property taxes and homeowners insurance) on the loan. This usually results in a lower monthly mortgage payment. The borrower does have the ability to pay extra towards the principle.

• Advantages The low monthly mortgage payments are very attractive. With an interest-only mortgage, you often qualify for a higher loan amount.


• Disadvantages Since you are not paying any principle on the loan, you are depending on the local housing market to increase the equity of your home. If the market value of your home drops, then you’ll end up with an upside-down situation, where you will owe more on the home than its value. This normally results in the homeowner living in the house much longer than anticipated.


• Who should consider an Interest-Only Mortgage? If you anticipate the value of your home to increase dramatically and plan to move in three – five years, then you may consider an interest-only mortgage. There was a dramatic increase in home values from 1999 – 2004, but in many areas of the country, housing prices have fallen.
  

Balloon Loans
Balloon loans are either not amortized or partially amortized short-term loans that become due in a period of usually three, five, seven, 10, or 15 years in one, large payment. In most cases the payment is based on a 30-year loan and has an attractive discounted rate similar to ARM rates. The main difference between an ARM and a balloon loan is that an ARM becomes due at the shortened maturity date. In some cases a balloon loan may have an interest-only payment that may keep the payment lower than an amortized loan. Keep your eye on the date, and avoid a huge payment by converting before the balloon payment comes due.

• Advantages A low initial monthly payment is attractive. Many balloon loans offer a conversion option, meaning that you could convert the balloon loan to a new loan after the initial term.



• Disadvantages A balloon loan carries more risk than an ARM because a balloon loan becomes fully due and payable by the maturity date. In the case of an ARM, the rate may go up or down at the first adjustment date, but you are not required to pay off the loan. A five-year ARM will have an adjustment after five years, but a five-year balloon will be due at the end of the five-year period. Interest rates may be higher at the end of the balloon term. If you cannot make the balloon payment at the end of the term, or you are unable to refinance or convert the loan at higher interest rates, you risk foreclosure.



• Who should consider a balloon loan? If you are ready to refinance at the end of the balloon term with potentially higher interest rates, you can risk the balloon loan. As a first-time home buyer, you might make a better choice by avoiding the risks associated with balloon loans.

First-Time Buyer Programs
Many lenders offer affordable mortgage choices geared toward the first-time home buyer. These choices clear the obstacles that made purchasing a home difficult in the past. First-time buyer programs can help borrowers who have not saved a lot of money for the down payment and closing costs, have a poor credit history or no history at all, have quite a bit of long-term debt, or have an unstable income.

• Advantages Programs designed to help first-time homebuyers require a lower down payment. Often you can qualify more easily, and you may even get lower rates through these programs.



• Disadvantages To qualify for first-time buyer programs, you may have to meet certain requirements for income and property-value limitations. Programs that have government subsidies may charge a "recapture tax" if you sell the house too soon. This penalty is designed to reduce improper use of the programs.



• Who should consider first-time buyer programs? If you are a first-time homebuyer, find out whether you are eligible for this type of program by asking lenders about income and home-value limitations.