When comparing different mortgage types it is important to know what you are looking for in the loan. It is also to know what types of mortgages are offered other than the basic fixed and variable. A few mortgages that you may or may not be familiar with are: assumable mortgages, balloon conforming mortgages, and balloon mortgages.
Assumable Mortgage
An assumable mortgage is an adjustable-rate loan where the balance is transferred to the buyer. A positive aspect is that sellers can use very low interest rates to attract potential buyers. A con is that this is not a fixed rate so that the savings are not high, if at all. Also, if the buyer cannot afford the payments, then the bank does not go after him or her, they go after the original borrower. However, these mortgages are not common at all today.
Balloon Conforming Mortgage
The balloon conforming mortgage has a fixed rate for a period of time, but the principal is not fully amortized. For the rest of the term, the rate adjusts to a new fixed rate, which is determined by the Fannie Mae net yield index plus the margin. The term agreement is usually for 30 years. This mortgage can be enticing because it offers lower initial rates. If your career is on the rise and you expect to be making more money in the near future, this mortgage might be the one for you. Also, if the market is hot and you plan on selling soon, then you can save money when the principal is due. The major problem is that no one knows what the new fixed interest will be, and you could end up having a huge rate that was not worth the low initial rate. If you think that your career will be booming by the time to principal is due and this doesnt happen, you may not be able to afford the mortgage.
Balloon Mortgage
A balloon mortgage is fixed for a period of time, but the principal is not fully amortized during the period. The rest of the balance of the principal is due at the end as a balloon payment. This can be positive because you will have lower payments, which allows you to sell or refinance before the balloon is due. On the other hand, if you planned on selling and the market is cold, you could end up paying the rest of balloon off. It is very easy to wait and put off paying the principal and in the process, your income changes and you are left with the principal. Also, if you refinance, you may end offsetting any money that you might have made thus far.
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