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Mortgage
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Definition
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"Pros"
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"Cons"
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Comments
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| 30-Year Fixed Rate |
Long-term loan in which the principal and interest is amortized, and the payments remain the same over the 30 year length of the loan. The loan will be paid in full after 30 years or can be paid off sooner. |
Payments never change in spite of inflation. Interest is tax deductible. |
Equity builds very slowly. |
Most common mortgage and a very favorable investment when interest rates are low. |
| 15-Year Fixed Rate |
Same as 30-Year but loan will be paid off in 15 years. |
Compared to the 30-Year, the 15-Year offers a lower interest rate, faster equity build up, and lower total interest paid over the life of the loan. |
Much higher monthly payments. Interest is tax deductible but there will be much less interest compared to the 30-Year loan. |
Popular mortgage for those that can handle the higher payments, such as older and middle-aged people. |
| ARM (Adjustable Rate Mortgage) |
Mortgage whose rate changes over time according to specific terms made by the lender, for instance short-term Treasury Bill rates. |
Low front-end interest rate, often below the market rate at inception. |
History indicates that payments are most likely to increase over time. ARM is risky if rates rise significantly. |
Good option for the buyer expecting a major income raise or expecting reduction in current, high interest rate. |
| FHA/VA Mortgage |
A mortgage that is guaranteed or insured by the government that makes the loan more affordable than other types of mortgages. |
Very little or no down payment is required. Interest rate somewhat lower than 30-year mortgages. |
Lower maximum limits on borrowing for FHA loans. VA loans require past US military services by borrower to qualify. |
Very good option for 1st time borrower with little money to invest in down payment. |
| GPM (Graduated Payment Mortgage) |
A mortgage with a fixed interest rate, offering low initial payments which increase by a predetermined total for the first couple of years and then level off. |
Lower and more affordable payments during 1st few years, but unlike ARM's buyer knows how much the payment will increase in the future. |
Slower equity build up. Loan is somewhat dependent on buyer's income rise in future years. |
A good option for buyers who expect their income to rise significantly, and who plan on staying in the home for 5 years or more. |
| Balloon Mortgage |
A short-term loan, usually 3-5 years at a fixed rate with the full balance due at the end of the 3-5 year loan period. |
Lower payments and full tax benefits. |
Little or virtually no equity build-up since monthly payments go primarily to cover interest. Final balloon payment requires refinancing of the loan or sale of the house. |
Viable option for the buyer who either will move during the 3-5 year term, or who is completely confident of a significant, short-term appreciation of the property. |