MORTGAGE INFORMATION AND ADVICE

Mortgage Types and Uses

30 Year Fixed 15 and 20 Year Fixed Hybrid ARM Hybrid Balloon Mortgage
Rate Changes
Never. Fully fixed for entire term. Never. Fully fixed for entire term. Usually after fixed period of 3, 5, 7 or 10 years. Fully variable. Never. Fully fixed for entire term.
After that, annual change typical. Typically changing at one-year intervals.
Some have shorter change intervals.
Benefits
Low, stable payment. Stable payments. Lower rates than fully fixed-rate mortgage. Can have lowest interest rates. Often has lower interest rate/monthly payment over balloon period than fixed rate.
Easiest Qualification. Builds equity faster. Can sometimes borrow larger amount for same income Qualification may not depend upon today’s interest rate Similar to hybrid ARM.
Lower total interest costs than 30-year term.
Drawbacks and Risks
Can have highest total interest cost over time. Requires higher income to qualify. Stable payment for a number of years, then unpredictable. Payments fluctuate at each rate change. Loan fully due and payable when balloon period ends.
User may “buy” more rate stability than actually needed, increasing cost. Less affordable monthly payment. Rates can jump by as much as 6 percentage points at first adjustment. Unpredictable, rates can change as much as 2 percentage points at each adjustment. Must be paid off or refinanced in unknown market conditions.
Must be paid off or refinanced in unknown market conditions.
Alternative Strategy
Consider Hybrid ARM with appropriate fixed period. Consider 30-year term and prepaying loan to preserve cash-flow flexibility. Consider Fixed rate mortgage or longest possible fixed period, if loan hold period not known. Consider Hybrid ARM to ameliorate rate and payment risks for a given period. Consider Hybrid ARM to ensure continued loan availability.
Useful For…
Purchasing a home. Refinancing to lower total interest cost. Purchasing or refinancing when time horizon is seven years or shorter, and where borrower can handle increase in monthly payments. Purchasing or refinancing when interest rates are near top of cycle, and are likely to fall, or sale or refinance is anticipated within three years. Purchasing or refinancing when time horizon is three years or longer and home will be sold prior to end of balloon period.
First-time homebuyers. Retiring mortgage more quickly.
Refinancing to improve cash flow/lower payment. Building or rebuilding equity more quickly.
Consider when…
Buying or refinancing a home and planning on owning for longer than 10 years. Buying second home. Buying a home and expect to move before fixed period ends, or know income will rise to offset payment risk, even in worst-case scenario. Buying or refinancing when income can handle frequent payment changes and worst-case scenario for rates over a four-year period. Buying a home and expect to move before balloon period ends, or have resources to pay off mortgage if refinance not available.
Refinancing to build equity.
Paying off mortgage before life event (retirement, etc).