Basic Home Mortgage Products Explained
There are two basic types of home mortgages, adjustable and fixed. Most people know the acronym for adjustable mortgages, ARM (adjustable rate mortgage). While there are other mortgage products, these two are the major two types that most everyone uses when buying a home.
ARMs
Like the name suggests, the interest rate on this type of mortgage adjusts, or fluctuates. The interest rate on an ARM will change to reflect to reflect the credit market. Generally these loans are offered with teaser rates, the first year or two, that are incredibly low. These teaser rates are at a point below the market rate. After the teaser rate is up, the mortgage adjusts several points higher. The post teaser rate will follow the trend of the bank rate, which is the interest rate of the bank, by a few points (higher than the bank rate).
Fixed
Also, like this name suggests, fixed rate mortgages offer a constant interest rate for the life of the mortgage. Typically offered in 15 and 30 years, some lenders are starting to offer 40+ year mortgages. This is the typical mortgage that most people use and the monthly payments will stay the same over the life of the mortgage. So, unlike an ARM, a fixed rate mortgage does not adjust over time to stay with current market trends. The rate will stay constant whether the market goes higher or lower.
Check back later for an in depth look at different types of mortgages and their benefits.
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