Mortgage 101 by Hallmark Home Mortgage

Buying a home is an exciting step. It’s an opportunity to choose a paint color, a neighborhood … really, to choose a lifestyle. It’s an expression of you and a realization of your dreams.

At the same time, it can be a bit intimidating. Because few of us have enough in our bank accounts to pay for a house in full, buying a home also requires choosing a mortgage—likely one of the biggest and most significant loans you’ll ever have.

It helps to begin with a basic understanding of the three main types of mortgages: fixed-rate, adjustable-rate and balloon mortgages. Each offers different advantages for different situations. With the help of an experienced mortgage consultant from Hallmark Home Mortgage, you’ll get the best options available, tailored for your specific needs.

Fixed-rate mortgage

The name says it all: With a fixed-rate mortgage, the interest rate stays the same over the life of the loan, whether you choose a 10-year mortgage, 15-year mortgage, 20-year mortgage or 30-year mortgage. No matter what happens with the economy, your rate will remain the same as the day you lock it in.

Fixed-rate mortgages come with a slightly higher interest rate compared with adjustable-rate and balloon mortgages. It’s the tradeoff for peace of mind—your mortgage payment won’t increase with market rates. And if rates drop significantly, refinancing to a lower rate might be an option.

Adjustable-rate mortgage

This type of mortgage starts with a fixed rate for a certain period of time. It might be one year, three years, five years, seven years or 10 years, depending on the loan you choose.

After that time, the interest on an adjustable-rate mortgage, or ARM, will change with the market. Typically, there is a limit on how much it can change in a given year and over the life of the loan.

If you choose an adjustable-rate mortgage, you must be prepared for possibly higher payments, up to those limits. Of course they could go down, too. The rate is variable in both directions. The real advantage of an ARM is a lower initial interest rate than a fixed-rate mortgage, meaning lower initial payments. This can be an advantage if you plan to move and sell your home before the initial fixed-rate period expires. And if rates jump significantly after the initial fixed period, you also may consider refinancing.

Balloon mortgages

A balloon mortgage is somewhere between a fixed-rate mortgage and an adjustable-rate mortgage. The interest rate is fixed, or the same, over the life of the loan. But the term of that loan is just five or seven years; after that time, the balance of the entire mortgage is due.

The interest rate on a balloon mortgage is typically lower than the one offered for a fixed-rate mortgage and higher than the one offered for an adjustable-rate mortgage. This type of mortgage can be an advantage if you plan to move and sell your home before the term expires; the lower interest rate means lower payments than a fixed-rate mortgage during that time. If you choose to stay in your home, you can apply for a new mortgage to cover the balance.

Fine-tuning your options

Within these broad categories of mortgages are many options, including programs for first-time home buyers, jumbo loans, construction loans, bridge loans and more. Depending on your situation, you may choose between a conventional mortgage product or a government loan. Government loans, including FHA mortgages and Veterans Administration (VA) mortgages, can help those who qualify buy a home with less money down than conventional loans.

This is when professional expertise is most necessary. The mortgage consultants at Hallmark Home Mortgage are an excellent resource—they guide buyers just like you through the process every day. Call and schedule a time to come in and talk to one of us. We can look at your personal situation, explain the range of options available to you and help you pinpoint which mortgage product will best suit your finances and allow you to achieve your dreams.

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