Fixed-Rate Mortgages
If your looking for a mortgage with payments that will remain essentially unchanged over its term, or if you plan to stay in your new home for a long term, a fixed-rate mortgage is probably right for you.  With a fixed rate mortgage, the interest rate you pay and the monthly principle and interest payments are agreed upon from the onset and will not change throughout the term of the mortgage.  In other words, the interest rate you close with wont change - and your payments of principle and interest will remain the same each month - until the mortgage is paid off.

As you can see, the fixed rate mortgage is an extremely stable choice.  You are protected from rising interest rates. It also make budjeting for the future very easy.  But in certain types of economies, interest rates for a fixed-rate mortage can be considerablly higher than the initial interest rate of other mortgage options.  That is the one disadvantage of a fixed-rate mortgage.  Once your rate is set, it does not change, and falling interest rates will not affect what you pay.  However you do have the option of refinancing if interest rates drop significantly.

Adjustable-Rate Mortgages (ARMS's)
An adjustable-rate mortgage (ARM) is considerably different form a fixed-rate mortgage.  It's best if your buying a home while interest rates are high, if you expect increases in income, or if you don't plan to keep your home long. Keep in mind, with an (ARM), you are taking the risk on the rise or fall of interest rates, not the bank.

In most cases, the initial interest rate of an ARM is lower than a fixed-rate mortgage.   With an ARM, your mortgage rate rises and falls with interest rates.  Each lender's interest rates are usually tied to a specific index like COFI, LIBOR, the T-Bill rate, or the CD index.  The rate you pay will be based on your lender's index plus a margin, usually two to three points.  Ask your lender for specifics.  Also, ask how the "Caps" will limit the amount your lender can increase your interest rate
in a single year and over the entire term of the loan.

The Covertable ARM
The convertable ARM is an option that is currently very popular. It's a combination of both fixed-rate and adjustable-rate mortages, offering the best of both options in one package.  The 
convertable ARM allows you to convert to a fixed-rate mortage after a set period of time.  For instance, you could get one-year ARM with the option to convert any time after the first through the fifth adjustment period.  this way you can initially benefit from the lower interest rate of a standart ARM, then take advantage locked-in payments later.

Balloon Mortgages
Another type of mortgage that has become popular in recent years is the balloon mortgage, so-called because it requires you to pay of your loan in full or refinance at the end of the mortgage term (usually five or seven years).  The advantage of a balloon mortgage is that your monthly payments during the mortgage term  are generally lower than they would be for a traditional 30-year fixed-rate mortgage.  Balloon Mortgages are traditionally popular with first-time homebuyers with growing families and with individuals who expect to be relocated by the employer.  If you anticipate moving in five to seven years, you can take advantage of lower interest rates (sometimes from three-eighths to three-quarters of a percentage point less than traditional fixed-rate loans) for that time period.  If you end up staying longer in your residence then you'll have to pay the balance at the end of the term, or more likely, refinance your mortgage at the then current interest rate.  Many lenders also offer an option that allows you to convert to a fixed-rate mortage, provided certain conditions are met.
Qualifications for a balloon mortgage vary depending upon the lender you choose, but most require at least a 20% down payment.

FHA and VA Loans(Also Known as Government Loans)
Verteran may qualify for Veterans Administration Mortgages.  There are caps on the size of a VA loan you can get, but this loan could be ideal for buying a lower priced home with a small down payment.  FHA or Federal Housing Administration loans are available to Americans with smaller incomes who are buying modestly priced homes.  Look for properties that are designated as "FHA approved." 

You should contact your tax advisor or attorney for more information on which mortgage products may be appropriate for you.
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