How Mortgages Work

You can finance your home in a variety of ways. Much like choosing the right house for you, finding the ideal mortgage takes a little research. In what follows, we’ve broken down the essentials of mortgages to help you decide what kind is right for you so you can go about purchasing that home today!

Types of Mortgages

There are two primary types of mortgages: fixed-rate mortgages and adjustable-rate mortgages (ARM). We’ve explained each one in detail below.

• Fixed-rate mortgages. This is the most common type of mortgage. This type of home loan offers fixed monthly payments and interest rates. Typically, fixed-rate mortgages have 15-year or 30-year terms. Fixed rate mortgages might be more popular because people hesitate at the prospect of their mortgage payments vacillating with interest rates. Likewise, fixed-rate mortgages are relatively inexpensive when interest rates are low.
  • Pros & cons of 30-year fixed mortgages: the advantages of a 30-year term are that you will enjoy lower monthly payments for the life of the loan and be able to deduct more interest expense from your taxes. On the other hand, the total cost and interest rates of these loans are higher, and you will build equity in your home more slowly than you would with a 15-year term.
  • Pros & cons of 15-year fixed mortgages: advantages include lower total interest cost, lower interest rates, and rapid building of equity in your home. Conversely, your monthly payments will be much higher, which might force you to buy a smaller house than you could’ve afforded with a 30-year mortgage.
• Adjustable-rate mortgages (ARM). Adjustable-rate mortgages will have vacillating interest rates and monthly payments as the market interest rates fluctuate. Most ARMs begin with a fixed-rate period during which your interest rate stays the same, followed by a lengthier period where your rates change according to the market rates. The selling point of ARMs is that they start with extremely low interest rates, often lower than those of fixed-rate mortgages. This initial, fixed-rate period can range from a month to ten years. If you expect interest rates to fall and don’t mind fluctuation in monthly payments, an ARM might be the way to go.
• Subprime mortgages. A flawed credit history doesn’t necessary preclude you from qualifying for home mortgages. In fact, there is an entire category of mortgages dedicated to serving consumers with less-than-perfect credit. Subprime mortgages target consumers with credit scores under 620. Bear in mind that you might not hear a subprime mortgage actually referred to as such because it doesn’t sell as well. You might instead hear it called “non-prime” or another euphemism. Unlike mortgages for people with stellar credit, there is a lot of variability in subprime mortgages in terms of what different lenders will offer you. Subprime mortgages generally have higher rates than regular mortgages and will usually carry balloon or pre-payment penalties as well.