Mortgage Mania: Fixed Rate, Adjustable Rate, Interest Only or Balloon?

mortgage-maniaIn addition to finding the best home in the right neighborhood and having to learn the ins and outs of the real estate business, first time home buyers will also need to spend some time educating themselves about the various types of mortgage loans available through your local credit union. The more you know about adjustable rate mortgages (ARMs), fixed rate mortgages, interest only mortgages and balloon loans, the better equipped you will be to make smart decisions when it comes time to finance your first home.

Fixed Rate Mortgage
When you get a fixed rate mortgage at your credit union in New Bedford, you can rest assured that what you see is what you’ll get. A fixed rate mortgage has a set interest rate from the date that you take out your mortgage loan all the way until the day you make your final payment.

Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage has an interest rate that can go up and down over the lifetime of the loan. Most ARMs will start off with a lower interest rate compared to the average fixed rate mortgage loans available at that time. While this starting interest rate may stay the same for several months or years at the beginning of your loan, once the introductory period is over you will see a change in the interest rate and your monthly payment will most likely go up.

What is a Balloon Loan?
In the world of mortgage loans and finance, the term “balloon loan” is used to describe any mortgage loan that would require a large payment at the end of the loan term. In most cases, a balloon payment would be more than one-and-a-half to as much as two times the loans average monthly payment, however it can also be tens of thousands of dollars. Most balloon loans will require a single lump sum payment to pay off the remaining balance of your mortgage loan at the end of the loan period.

What is an Interest Only Mortgage Loan?
This type of loan is a mortgage loan that has required schedule payments that only pay on the interest portion of the loan for a specific number of months. The amount that you owe for the principal of the loan will not go down with each payment you make, so when the interest only period ends you will need to consider your options. When considering an interest only mortgage loan, don’t ever assume that you will be able to refinance the loan at the end of the interest only term.

Why Do ARM Rates Go Up?
With an adjustable rate mortgage, your payment will go up when the index of average interest rates moves higher. Your intereset rate is tied to a broad measure of interest rates in the financial industry, which is known as an index.

  • When index rates go up, your monthly payment will go up.
  • When index rates go down, your payment may go down.

However, not all ARMs will allow payments to go back down once they go up and many will limit the amount of each adjustment made to your interest rate and payment. Some create a cap on how high or low your rate can change throughout the life of your mortgage loan.

Getting a Mortgage Loan at Your Local Credit Union
When you get a mortgage loan for your new home, whether it be a fixed rate mortgage or an ARM, make sure to ask a lot of questions and know all of the details of your loan. Start date, final payment date, interest rates and monthly payment amount are all important things to know.

If you have an ARM, make sure to find out if there are any caps on the maximum or minimum interest rates and monthly payments and how often your interest rate will be adjusted. Find out how long the introductory period of the ARM mortgage loan is and figure out whether or not your would still be able to afford your mortgage if the payment went up to the maximum amount.

Contact your representative at your credit union in New Bedford for more information about available mortgage loan options and opportunities for credit union members. St Anne Credit Union in New Bedford has a line of home loan and home equity loan options available to members who work or live in Plymouth or Bristol counties. Contact St Anne Credit Union today to find out more about fixed rate mortgage and mortgage loan opportunities.