This short video summarizes the main kinds of mortgages available for home buyers:
- Adjustable Rate Mortgage, commonly called “ARM”
- Fixed-Rate Mortgages
- Balloon Mortgages
- 2-Step Mortgages
ARMs, as the name suggests, will change over time. As market interest rates vary, the mortgage interest rates and payments will vary with them. Buyers opting for ARM loans take on responsibility for meeting payments even if interest rates go up significantly.
Fixed rate mortgages lock in interest rates for the entire loan. If the interest rate on a fixed-rate loan is higher than an ARM today, the rate and payments will not change in the years to come.
Balloon mortgages are sort of “shaped like a balloon” — smaller at the bottom, bigger at the top. In financial terms, balloon mortgages provider lower interest rates for the early years of a loan — usually 5 years, 7 years, or 10 years. Then the balance and interest are adjusted and refinanced, which sometimes requires a large ‘balloon’ payment.
Two-Step mortgages are like super-simplified ARMs. Interest rates adjust, but only one time.
Other options for mortgages are available, and worth investigating for your particular situation. For veterans, VA loans are a frequently a great option; see the VA loan series on this site for additional details. Other government programs for non-veterans may also be available.
Real estate professionals and lenders can help you make sense of the current market and the options that might suit you best.