A Comparison Of Adjustable-Rate And Balloon Mortgages

Mortgages are extremely important financial tools in the sense that they can impact your life for several decades. For this reason, you want to make sure that you pick the mortgage that's right for you. To do that, you will need to understand each of your options in detail. To help you get started with that, here are explanations of two of the most common types of mortgages: adjustable-rate mortgages and balloon mortgages.

What is an adjustable-rate mortgage?

In essence, an ARM has a variable interest rate. The interest rate may increase or decrease over the course of the loan's lifespan, which can be several decades long. Most interest rates are tied directly to indexes, meaning that they aren't directly controlled by your lender. This means that your lender cannot directly raise or lower your interest rate and that the amount that you pay will depend mostly on how a certain portion of the economy is performing.

What is a balloon mortgage?

A balloon mortgage has a fixed interest rate and a strict schedule of payments, which means that you will be paying a similar amount every month. This may sound like a fixed-rate mortgage, but the key difference is that a balloon mortgage is much faster and has a huge payment at the end (the ballooning).

When is an adjustable-rate mortgage better?

If you are looking to save money in the short term, then an ARM can be your best bet. ARM's often start with very low interest rates as incentives for borrowers, which means that you will initially be paying much less than you might for an FRM or ballooning mortgage.

However, there can be some long-term benefits to ARMs as well. If you can manage to predict the market correctly, then you can take out an ARM and take full advantage of the low interest rates. Once you think that the interest rates will rise in the near future (thereby making it harder to get a good price for your home), you can sell quickly, meaning that you will avoid most of the negative effects of the increasing interest.

Where is a balloon mortgage better?

On the other hand, a balloon mortgage is a good choice if you want stability and are able to bear the large financial toll of a shorter mortgage term. If you don't have enough money to buy your home outright but have reason to believe that your income will be able to pay for your home in several years, then a balloon mortgage can help you focus your financial efforts on acquiring your home.

Since the term of the mortgage is shorter than most FRMs, you will end up paying less in interest overall, even though each individual payment will be greater. In some cases, you might even have payments that are the same size or smaller as FRM payments for a 15-year mortgage, with the main difference being that the balloon payment will be exceptionally large.

For home mortgages, contact a business such as McHenry Savings Bank