Mortage Talk

The two major types of home loans are fixed rate and adjustable rate mortgages (ARMs). The benefit of a fixed rate loan is that your monthly payment does not change over the life of the mortgage – whether it is 10, 15, 20 or 30 years. The state of the economy has no impact on your payment, which will never go up. The interest on a fixed rate is typically higher than on an ARM but you are paying for loan security. If you plan to remain in the home for at least five years, this type of loan is appropriate for you.

ARMs are popular with buyers who prefer a lower interest rate for the first three, five or seven years of the loan. Depending on the state of the economy, the interest rate can and usually does go up after the initial fixed rate period. (It can also go down but that is not likely to happen.) Buyers who opt for this type of loan are gambling that their income will rise high enough to cover the rate increase or that they will either be able to refinance or sell their home before the rate adjustment goes into effect. The amount of rate increase is uncertain and cannot be predicted.

ARMs have been one of the major causes of home foreclosures due to homeowner’s loss of income or a dramatic rise in the interest rate causing a situation whereby he or she can no longer afford the cost of staying in the home.


Second mortgages are another type of loan which typically are granted for five to seven years and carry a “balloon” payment as the final obligation to clear the mortgage. The borrower pays the same rate of interest for the first five or seven years and the monthly payment remains the same. However, at the end of this period, the entire balance of the mortgage is due and payable. The homeowner must obtain financing or sell the home at this time to avoid coming up with a very large amount of money. There is no way of knowing what the interest rates or what the borrower’s financial situation will be at that time.

Author Bio:
Trey is the Houston real estate marketing manager for VIP ClientSide. Our team specializes in Houston Condos and Houston Office space rentals.