Comparison Of Mortgages Essays Examples

Edward Julius

The fixed-rate mortgage is one of the most popular types of mortgages. It features an interest rate that is fixed for the entire mortgage period, and is not influenced by fluctuations in general interest rates. Therefore, the amount of monthly payment constantly remains the same, so you are always aware of the portion of your budget that must be allocated for mortgage payments. This is a major advantage of this mortgage type. If the interest rates are low, it is highly beneficial to select the fixed-rate mortgage over the adjustable-rate mortgage (ARM), for instance, as the mortgage interest rate will not increase even with the potential rise of interest rates within the economy (National Association of Investors Corporation, 2007).
Unlike the fixed-rate mortgage, ARM has an interest rate that adjusts over a certain time period, generally, on an annual basis. Adjustments depend on the changes of overall interest rates in the economy. Consequently, monthly payments may increase or decrease, depending on how well the economy is doing. ARMs often have a maximum change per year and a “cap limit” on the interest, so that in case of a major economic downturn the mortgage does not become impossible to cover (National Association of Investors Corporation, 2007). Despite the ARM can be riskier than the fixed-rate mortgage, its initial rate is usually lower.
Balloon mortgages are relatively similar to the fixed-term mortgages, but with one large, “balloon”, payment at the end of the loan term, which entirely covers the remaining loan (National Association of Investors Corporation, 2007). Balloon mortgages have a long loan term, usually from 5 to 7 years, and are most popular among home buyers who plan to move before the mortgage period ends. Normally, balloon mortgages’ interest rates are 38 to 34 of a percentage point lower than traditional fixed-rate mortgages.
Therefore, the fixed-rate mortgage can be more advantageous than the other two when the overall interest rates in the economy are low, since you will be able to maintain affordable monthly payments without having to worry about what will happen to the economy and the interest rates in the future.

References

National Association of Investors Corporation (2007). Investing in your future (2nd ed.). Mason, OH: Thomson South-Western