Buying a house is stressful and choosing a mortgage loan to get the right mortgage can be one of the most stressful elements. Tying yourself into a mortgage is a big step and there will always be a certain risks involved with every type of mortgage, particularly in the current unpredictable economic climate.
A fixed rate mortgage is good if you are on a tight budget and need the stability of knowing that your monthly repayment will remain the same for a defined period. A fixed rate mortgage loan, as the name suggests has a fixed interest rate. The danger with fixed rate mortgages is that you could end up paying more than you would on an adjustable rate mortgage if interest rates fall. With most fixed rate loans early repayment charges apply and at the end of your fixed rate term, make sure you have enough funds to suddenly start paying more as at the end of the period you may be linked to a base rate that is higher than your fixed rate.
An adjustable rate mortgage has a fluctuating interest rate, usually tied to the Treasury bill rate or prime rate. Your repayment amount will change in response to changes in these rates to ensure the mortgage stays in step with market rates. Adjustable rate mortgages are usually for a shorter period and are good for those who want to take advantage of low interest rates, or are anticipating lower interest rates in the future and may not be staying in a home for along time.
A mortgage of this type obviously comes with a higher level of risk as there is no way of guaranteeing that interest rates will fall, or remain at a low level. Adjustable rate mortgages are usually offered at better rates than fixed rate mortgages in acknowledgment of the higher level of risk the borrower is taking. Those taking adjustable loans are normally protected with a ceiling or capped maximum rate.
A convertible mortgage loan offers the borrower a chance to spread the risk a little by starting with a low adjustable rate and later switching to a fixed rate for a fixed period. This conversion incurs a fee and the fixed rate is usually slightly higher than the current market rate.
Convertible mortgage loans can give the best of both worlds and are commonly used to take advantage of low introductory rates typical of adjustable rate loans, with the option of `locking in` to the fixed rate if interest rates begin to rise. Less common, but still an option from some lenders is a convertible mortgage starting out with a fixed rate but including the option to switch to adjustable if rates interest rates are dropping.
A balloon mortgage loan acts like a fixed rate mortgage in that payments are spread evenly over a fixed period, but the difference is that it does not amortize like a fixed rate mortgage would over the term. Instead there is a lump sum or balloon payment at the end of a predetermined period. For example a balloon mortgage could have monthly repayments similar to a thirty year fixed term but after fifteen years the full balance is due and the borrower will have to pay it off or refinance.
The interest rate on balloon mortgages is usually lower than a fixed rate mortgage; however you will have to make sure you can pay off the full amount outstanding either through savings or from refinancing. The variety of loans available can be very confusing and there is no way of definitively predicting your financial circumstances in five, ten or twenty years in order to determine what might be best for you. A mortgage cost calculator is a very useful tool for comparing the repayment schedules of different types of loan currently on the market.
I hope this helps you in choosing a mortgage loan.