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Mortgages at a Glance

Mortgages used to be simple. You made a down payment on the house of your dreams and borrowed the balance at a fixed rate of interest, promising to pay it back in regular monthly payments over a period of years.

Today you must make choices. Do you want the traditional 30-year fixed rate mortgage with its guarantees of unchanging monthly payments? Perhaps a fifteen-year loan would be better? Or would you prefer an adjustable rate mortgage with monthly payments that can rise and fall in accordance with an index reflecting economic conditions?

Below is a brief synopsis and the pros and cons of some of today’s most popular mortgage loans:

Mortgage Type Definition Advantages Drawbacks Comments
30 Year Fixed Rate

A long-term loan in which principal and interest are amortized over 30 years; both interest rate and amount of monthly payment remain unchanged for life of the loan.

Considerable tax benefits, especially in early years.

Payments never rise,
regardless of inflation.

Slow equity build-up.

The most common mortgage in the U.S., a particularly good investment when rates are low.

15 Year Fixed Rate

Same as above but payback period is 15 years.

Usually lower interest rate than 30-year.

Faster equity build-up.

Less interest paid out over life of loan.

Higher monthly payments.

Less tax-deductible interest.

An excellent option for middle aged and older buyers.

Adjustable Rate (ARM)

A mortgage whose rate changes over time according to terms specified by the lender, usually according to short-term Treasure Bill rates.

Low initial interest rate, sometimes below market.

Payments may decrease over time.

Payments may increase over time.

Risky if rates rise significantly.

Good option for buyers whose income will rise and/or when rates are expected to drop.

FHA/VA Mortgage

Government-insured or guaranteed mortgages that can make purchase more affordable than conventional loans.

Little or no down payment required.

Marginally better rate than conventional 30-year mortgages.

Lower limits on the maximum that can be borrowed.

VA requires current or past military service.

Good option for first time buyers with little to invest in a down payment.

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