30 Year Fixed

These are mortgages where interest and mortgage payments remain the same for 30 years, at which time you will have paid back the entire loan.

Who is this good for?

Those who prefer the security of fixed-monthly payments like fixed-monthly mortgages. Often, these mortgages are more expensive than their adjustable-rate counterparts, but they are easier to understand and provide the greatest payment stability. If you can afford this loan and plan to be live in your home for 10 or more years, this may be the best option for you.

15 Year Fixed

These are mortgages where interest and mortgage payments remain the same for 15 years, at which time you will have paid back the entire loan. These loans offer the lowest fixed rates but have the highest monthly payments because you are paying off the loan in a shorter timeframe.

Who is this good for?

Those who prefer the security of fixed-monthly payments and can afford the higher monthly payments of a 15-year term like this mortgage. You will build equity quickly, but the high monthly payments may restrict the overall price of the home you can afford.

ARMs

Adjustable-rate mortgages (ARMs) are mortgages where the interest rate you pay adjusts at a specified time and frequency. There are many different ARM products, but generally they offer a lower initial rate than a 30-year fixed and they adjust with market trends. Therefore, when your initial rate period ends and your ARM is ready to adjust you may be paying more (with higher current market trends) or less (with lower current market trends) than your initial rate. Generally, ARMs follow this pattern: the shorter the initial term, the lower the initial rate.

How do adjustments work?

Adjustments vary on the type of ARM, but you can identify the initial rate period by the first number and the adjustment frequency by the second number. A 3/1 ARM means the same initial rate for 3 years and an adjustment once every year after that. The following table will help you understand how adjustments work:

7/1 ARM Same initial rate and payment for 7 years, then on the 8th year the rate and payment adjusts once and continues to adjust once each year for the remainder of the loan.
1/1 ARM The rate changes once each year for the entire term of the loan.
3/3 ARM Same initial rate and payment for 3 years, then on the 4th year the rate and payment adjusts and continues to adjust once every 3 years for the remainder of the loan.

Who is this good for?

If you are planning on selling your home in a given time frame an ARM might make sense. Let’s say you are planning on moving in 5 years, a 5/1 ARM could work well because it provides a lower rate and monthly payment, and when it is ready to adjust after 5 years, you won’t experience a payment change if you sell your home.

Savvy investors like ARMs (or really any mortgage that puts more cash at their disposal each month) because instead of paying higher monthly mortgage payments, they can use that extra money to make higher-yielding investments.

Interest Only

These are fixed or adjustable rate mortgages where you the option of paying interest only for a specified term, usually five to ten years. After the initial term the mortgage switches to a fully-amortizing mortgage for the remainder of the loan. Let’s say you had an interest-only option for the first 7 years of a 30-year fixed loan. At the beginning of the 8th year, you would have to pay interest and principal for the full amount in the remaining 23 years. Often, at the end of the initial interest-only period, you would refinance instead of paying the high monthly mortgage payments.

Who is this good for?

Interest-only mortgages make sense for people who expect their financial situation to change in the near future. Young professionals like doctors and lawyers may also prefer this mortgage since they believe they will be making significantly more money in the future than they do now. Or parents who have children graduating from college soon might like this loan since they expect to have fewer expenses in the near future.

Those who prefer to use the extra cash for investments rather than mortgage payments also like this mortgage

Payment Option “flex pay”

These are mortgages where you have the option of paying different amounts each month. Usually, the monthly payment options include a low payment option, an interest-only option and an interest plus principal option. The low payment option creates negative amortization and usually adjusts yearly with a maximum rate cap.

Who is this good for?

People that do not have steady incomes may like this loan. It provides the most flexibility from month to month. For example, a salesperson that gets commissions quarterly can pay interest only for 3 months and then, when they receive their commission, pay both interest and principal for the entire quarter. This allows the salesperson to pay their mortgage down in a way that meets their specific income schedule.

Those who prefer to use the extra cash for investments rather than mortgage payments also like this mortgage. The payment options provide flexibility, but you should be certain that you have financial discipline before taking on this loan.

Balloon

These are fixed short-term mortgages that follow an amortization schedule like traditional long-term fixed mortgages. Balloon terms are commonly 3, 5 or 7 years during which you are paying both interest and mortgage. At the end of the term you’d have to pay off the resulting balance, usually by refinancing. However, some balloon loans also allow you to convert to a long-term fixed at the end of the initial term.

Who is this good for?

Balloon mortgages work for people that like the stability of fixed payments but can’t afford a long-term mortgage. Also, if you are planning selling your home in a given time frame a balloon mortgage might make sense. You can compare the rates between balloons and ARMs to see which can give you the best interest rates. Since you’ll be moving at the end of the term anyway, you won’t need to worry about paying off the balance – providing of course you can sell your home for more than the balance.

Savvy investors also like balloons (or really any mortgage that puts more cash at their disposal each month) because instead of paying higher monthly mortgage payments, they can use that extra money to make higher-yielding investments.