Pros:
Fixed Monthly Payments
Constant interest rate for life of the loan
Protected if rates go up
Can refinance if rates go down
Cons:
Higher Interest Rate
Higher Monthly Payment
Adjustable Rate Mortgages (ARM):
Adjustable rate mortgages (ARM’s) are becoming increasingly more popular in today’s market. ARM’s are fixed for a period of time and then float at a margin above an index. Margins will vary subject to the lender and type of product. The interest rate on ARMs tends to be lower than the interest rate on fixed products. ARM’s offer the borrower short-term stability at a lower rate, which makes them especially appealing to those who plan to sell the property within the next few years.
Pros:
Lower initial monthly payments
Lower initial interest rates
Cons:
More Risk
Payment may change during life of loan
Interest rate my change during life of loan
Interest Only Loans:
An interest only loan is a home mortgage product that only requires you to make payments on the interest accrued each month. Interest only loans are available on adjustable rate mortgages (ARM’s) and Option ARM’s home equity lines of credit (HELOC’s). The most attractive feature of an interest only loan is the small monthly payment. It is important to remember, however, that if you are only paying the interest each month, then you are not applying anything towards the principle loan amount – you are not building equity.
Pros:
Very low monthly payment
Cons:
Do not gain equity by making minimum payment
Will need to convert/refinance at end of term
Home Equity Line of Credit (HELOC):
A Home Equity Line of Credit (HELOC) is a flexible, low-interest way to pay for major expenses, such as a new addition to the home, a vacation and consolidating monthly debts. A HELOC sometimes is a revolving line of credit with an adjustable interest rate (indexed to the prime rate) and sometimes it is fixed-rate loan that allows you to leverage the equity in your home into cash for purchases, refinancing or debt consolidation. If you need to borrow money and want the flexibility of when you can take the cash out, HELOC loans may be a useful source to turn to. Some home equity lines will set a fixed draw period time of when you can make withdrawals from your account. Once the draw period expires, you may be able to renew your credit line. HELOC’s most often result in lower closing costs than a conventional mortgage.
Pros:
You only borrow what you need
Pay interest on only what you borrow
Flexible access to funds
Cons:
Interest rates tend to be higher than 1st Mortgages
Harder to refinance 1st Mortgage
