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The Main Types of Home Mortgage Loans

Mortgage loans are a perfect choice for people who are looking to finance the purchase of a new home. They provide you an excellent opportunity to buy a property now and pay it off within several years. However, it can be a difficult task to navigate through the thousands of online home loans to find the right offer for you. The deals can considerably vary in their terms and features. Our article will tell you about the main types of loans available on the market to make a more educated choice.

Home mortgage loan is a standard way to purchase residential or commercial real estate without the need to pay the full value immediately. The borrower gives the lender a lien on the property as collateral. When the debt is paid off in full, the lien on the property expires.
There are two main types of home mortgage loans - a fixed rate and an adjustable rate mortgage. Their main difference is in the interest calculation.
A fixed rate means that the interest rate remains the same during the entire life of the loan. Typically, lenders provide them for 30, 20 and 15 years. For example, the bank can offer you a fixed 8% loan for 15 years. Whether the market rate rises to 9% or decreases to 6%, you will continue to pay 8%.
The main benefit of a fixed rate loan is stability. The borrower is protected from sudden and potentially significant increases in monthly payments. You will know exactly what your interest and principal payments will be. It makes your budgeting easier.
The downside of that type of the loan is that the interest will probably be higher than the interest rate of an adjustable rate mortgage.

In an adjustable rate mortgage, the interest changes during the life of the loan. These changes are linked to an index rate (Treasury bills, etc.) and move in accordance to it.
Lenders often provide adjustable rate mortgages with a very low 'teaser' interest rate. It typically lasts for one year. After that time period, the interest rate will go up in accordance with the terms of the loan. For example, you can choose a loan with a teaser 2% adjustable rate that becomes a 6% adjustable rate when the introductory period is over.
Sometimes you can find a hybrid between adjustable rate and fixed rate mortgages called 'delayed adjustable' mortgages. In this type of the loans, you will have a fixed rate of interest for a set period of time - 3, 7 or 10 years. Afterwards the interest rate adjusts at a pre-arranged frequency.

The main advantage of an adjustable rate mortgage is low initial payments, so you can afford more expensive homes. If your index rate decreases, you can enjoy lower payments without the need to refinance. However, an adjustable rate mortgage can pose some significant downsides. Your monthly payment may frequently change. If you take on a large loan, you could be in trouble when your index rate rises.
When choosing a suitable loan, consider your financial situation and your needs. An adjustable rate mortgage may be a good match if your primary requirement is low payments or if you are going to sell the property in several years. If interest rates tend to rise, or predictable payment is important to you, a fixed rate mortgage may be the way to go.

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