interest in the first years of the loan. Allows borrowers to qualify for a higher loan amount than with a 30-year or 15-year fixed-rate mortgage.
Disadvantages: Monthly payments can increase significantly if rates rise, although most adjustable-rate mortgages have annual and lifetime interest rate caps.
Who should consider this type of mortgage: Good for those who know their income will increase over the coming years or those who are moving in a few years and arenâ€™t concerned with a rate hike
40-Year Fixed Rate
Benefits: Allows buyers to reduce their monthly payment and qualify for larger loans than with a 30-year or 15-year fixed-rate mortgage. Principal and interest payment remains the same over the life of the loan. Lender assumes risk of rising interest rates.
Disadvantages: The balance of the loan is paid off very slowly, and borrowers pay much more interest than with a 30-year or 15-year fixed-rate mortgage.
Who should consider this type of mortgage: Can help buyers in higher priced regions qualify for a larger mortgage, but the amount by which the monthly payment is reduced is often not very significant, compared to a 30-year fixed-rate loan.
Benefits: Lower initial payments. Allows borrowers to qualify for a higher loan amount than many other types of mortgages.
Disadvantages: Initial payments do not reduce principal. After the interest-only period, payments can rise significantly when principal payments kick in and the interest rate is adjusted.
Who should consider this type of mortgage: May be used by buyers who do not plan to stay in the home longer than the initial interest period and who have a tolerance for risk. If the home decreases in value, the owner is more likely to end up owing more than the home is worth.
Benefits: Allows for much lower monthly payments than many other types of mortgages and can help buyers qualify for higher loan amounts.
Disadvantages: The monthly payment is less than the amount of interest owed on the loan. The unpaid interest is added to the loanâ€™s principal amount, increasing the total amount owed. The home must appreciate considerably to realize a gain or to break even at sale.
Who should consider this type of mortgage: Helpful for buyers who have considerable financial assets and would prefer to invest their money in other vehicles and can tolerate risk.
Option Payment Adjustable Rate
Benefits: Gives buyers flexibility in payments from month to month. Buyers may make a minimum payment, an interest-only payment, or a payment calculated to pay off the loan over either 30 or 15 years.
Disadvantages: If buyers make minimum payments, there will be negative amortization, which means the total amount of the loan will increase.
Who should consider this type of mortgage: Useful for buyers who are disciplined with their finances and for those with incomes that fluctuate from month to month (salespeople on commission, for example).