Mortgage Types
Since some mortgage options are less conservative than others, it's important to determine if you are a risk taker or if you prefer more stability in your financial dealings. Do you invest in the stock market? Or do you put your money into certificates of deposit?
These are two different ways of handling money. Your answers to these and other questions that may be asked by your lender will help you to choose the mortgage that is right for you.
When financing a home, it's important to understand whether you are a risk taker or whether you are more conservative in your financial dealings. Use these questions to help you decide if you are more or less risk averse. Your lender may use similar questions to understand your financial personality and to help you structure a mortgage that works for you.
- Do you always know your bank balance?
- Are you comfortable with a higher level of uncertainty?
- Do you invest in the stock market?
- Do you prefer to put your money into certificates of deposit?
There are many different ways to finance a home. This table describes some of the options you should discuss with your real estate sales professional and the lender you select.
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How It Works
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Benefits
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Disadvantages
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When to Consider
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Fixed-Rate Mortgage
Borrower and lender agree upon an interest rate and corresponding principal and interest payment. They remain constant throughout the life of the loan.
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- Stable and predictable
- Makes budgeting for the future easy
- Protects borrower from rising interest rates
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- Interest rates are higher than initial interest rates for other types of loans
- Doesn't benefit you when interest rates fall
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- You prefer not to take risks
- You plan to stay in your home for more than 5-7 years
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Adjustable-Rate Mortgage (ARM)
Borrower and lender agree on an initial interest rate that will change periodically, usually in relation to a specific index. Payments rise and fall accordingly.
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- Interest rates are generally lower than fixed-rate mortgages at the beginning of the loan
- If interest rates fall, your payments go down
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- Borrower takes the risk on the rise and fall of interest rates
- Future payments are unpredictable
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- Interest rates are high
- You plan to keep the home for a short time
- You expect an increase to your income
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