Below is a brief synopsis of the types — and the pros and cons — of some of today's most popular mortgage loans.
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30-YEAR FIXED-RATE
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A long-term loan in which principal and interest are amortized over 30 years; both interest rate and amount of monthly payment remain unchanged for life of the loan.
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Considerable tax benefits, especially in early years. Payments never rise, regardless of inflation.
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Slow equity build-up.
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The most common mortgage in the U.S., a particularly good investment when rates are low.
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15-YEAR FIXED-RATE
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As above, but payback period is 15 years.
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Usually lower interest rate than 30-year. Faster equity build-up. Less interest paid out over life of loan.
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Higher monthly payments; less tax-deductible interest.
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Good option for buyers whose income will rise and/or when rates are expected to drop.
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ARM (Adjustable Rate Mortgage)
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A mortgage whose rate changes over time according to terms specified by the lender, usually according to short-term Treasury Bill rates.
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Low initial interest rate, sometimes below market. Payments may decrease over time.
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Payments may increase over time. Risky if rates rise significantly.
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Good option for buyers whose income will rise and/or when rates are expected to drop.
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FHA/VA MORTGAGE
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Government-insured or guaranteed mortgages that can make purchase more affordable than conventional loans.
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Little or no down payment required. Marginally better rate than conventional 30-year mortgages.
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Lower limits on the maximum that can be borrowed. VA requires current or past military service record.
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Good option for first-time buyers with little funds to invest in a down payment.
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GPM (Graduated Payment Mortgage)
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A fixed-rate mortgage offering low initial monthly payments that increase by a predetermined amount, then level off after about five years.
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More affordable payments for first few years. Unlike ARMs, buyer knows up front how much payments will rise in the future.
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Slower equity build-up. Buyer's income may not rise in proportion to payments.
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Another good choice for buyers who expect income to rise after home is purchased.
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Balloon Mortgage
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A short-term (3-5 year) loan, usually at a fixed rate. Paid back in equal, monthly payments and a final "balloon" payment for the remaining balance.
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Lower monthly payments. Full tax benefits.
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Little or no equity build-up. Monthly payments are often interest only. Balloon payment usually requires refinancing or selling the house.
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Designed for buyers who plan on moving within a few years and/or are confident in the short-term appreciation of a property.
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