The Doc Explains: Mortgages and their Pros & Cons |
1. Fixed-rate mortgage (FRM)
Pros:
- The interest rate and monthly payments remains unchanged over the term of the mortgage.
- Easier to understand and budget for.
Cons:
- Borrower cannot take advantage of falling interest rates.
- Lenders are not usually flexible with the terms and conditions.
- Rates are somewhat higher than other types of mortgages.
2. Adjustable-rate (ARM)
Pros:
- The rate is usually lower than that of a fixed-rate mortgage.
- Compared to an FRM, the chances of getting a larger mortgage are better.
- Falling interest rates work to the advantage of the borrower, reducing monthly payments.
- Lenders will show more flexibility in meeting a borrowers requirements.
- After an initial period, any rise in interest rates will increase monthly payments.
- More difficult to understand.
- Less knowledgeable borrowers may be vulnerable to shady mortgage practices.
3. Federal Housing Administration (FHA) Loan
Pros:
- Generally, it carries a lower interest rate than conventional loans.
- Relatively easy to qualify for.
- The loan is guaranteed by the Federal Government.
Cons:
- Requires a good and stable employment track record.
- A down payment of less than 20% may require the payment of mortgage insurance.
- A property has to meet minimum standards of habitation.
4. Veteran Administration (VA) Loan
Pros:
- Guaranteed loans for active duty personnel, eligible veterans and their surviving spouses.
- Competitive Interest rates.
- Low or zero down payments.
- Easy to qualify for.
- Easier to refinance a VA Loan than a conventional loan.
Cons:
- Limits on the size of loan.
- A down payment of less than 20% requires the payment of mortgage insurance.
- To guarantee the loan, a Funding Fee is charged. Typically it is 2% for new loans or 0.5% on refinance loan).
5. Balloon mortgage
Pros:
- This is a fixed rate home loan for a period of five to seven years. Monthly payments are not subject to interest rate fluctuations.
- Most balloon mortgages provide an option to convert to a new loan after the initial term.
- Relatively easy to qualify for.
Cons:
- Higher risk of foreclosure, as the entire balance of the loan has to be paid back when due.
5. Interest-Only mortgage
Pros:
- Low monthly interest only payments, on a fixed term mortgage.
Cons:
- Risky for a borrower as the full balance of the loan is due at the end of the term.
For more detailed information on mortgages go to Bocazo's Mortgage Library
Pros:
- Low monthly interest only payments, on a fixed term mortgage.
Cons:
- Risky for a borrower as the full balance of the loan is due at the end of the term.
For more detailed information on mortgages go to Bocazo's Mortgage Library