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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, |
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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