Below is a brief synopsis of the types - and the pros and cons - of some of today's most popular mortgage loans.
| 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 |
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. |
Good option for buyers whose income will rise and/or when rates are expected to drop. |
| ARM (Adjustable Rate Mortgage) |
A mortgage whose rate changes over time according to terms specified by the lender, usually according to short-term Treasury 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 record. |
Good option for first-time buyers with little funds to invest in a down payment. |
| GPM (Graduated Payment Mortgage) |
A fixed-rate mortgage offering low initial monthly payments that increase by a predetermined amount, then level off after about five years. |
More affordable payments for first few years. Unlike ARMs, buyer knows up front how much payments will rise in the future. |
Slower equity build-up. Buyer's income may not rise in proportion to payments. |
Another good choice for buyers who expect income to rise after home is purchased. |
| Balloon Mortgage |
A short-term (3-5 year) loan, usually at a fixed rate. Paid back in equal, monthly payments and a final "balloon" payment for the remaining balance. |
Lower monthly payments. Full tax benefits. |
Little or no equity build-up. Monthly payments are often interest only. Balloon payment usually requires refinancing or selling the house. |
Designed for buyers who plan on moving within a few years and/or are confident in the short-term appreciation of a property. |
