Buying a home is probably the biggest decision you will every
make.  But deciding to buy is only the first step in the
decision making process.  
 
Now, you must decide what type of mortgage is best for you, and
if you’ve never bought a home before then the terms can be
confusing.
 
Many factors must be considered when selecting the right
mortgage.  Most importantly, borrowers must understand how the
different types of mortgages are structured.  
 
The three most common types of mortgages are adjustable rate
mortgages, fixed rate mortgages, and balloon mortgages.
 
An adjustable rate mortgage (ARM) is structured so that the
interest rate is not locked down.  
 
Usually, the introductory rate is set for about 5 to 7 years,
at which point it will be adjusted either up or down, depending
on the current interest rates.
 
After the initial rate adjustment, ARMs are usually adjusted
every two years for the remaining length of the loan.  Interest
rate adjustment is usually capped at about 2 percent, meaning
that the interest rate cannot be adjusted more than that each
time.  
 
ARMs are also set with a maximum adjustment rate.  If the
maximum adjustment rate is 7 percent, that means that the
highest rate the borrower ever pays is 7 percent above the
initial interest rate on the loan.
 
Fixed rate mortgages (FRM) are just that:  fixed.  The interest
rate will never be adjusted.  
 
These mortgages offer the lowest risk to the borrower, because
they protect from rising interest rates.  If the life of the
loan is 30 years, then the borrower is protected for 3 decades
from fluctuations in the market.
 
Drawbacks of FRMs are two-fold.  If interest rates go down, you
are locked into a higher rate.  And often FRMs carry higher loan
costs, because they carry high risks for the lender.  
 
If a lender signs you to a 30 year FRM at 6 percent interest,
and then interest rates continue to rise, the lender is locked
into accepting 6 percent interest for the life of the loan.
 
Balloon mortgages operate quite differently, and are structured
so that there will be a balance at the end of the term – usually
5 or 10 years – that must be repaid.  
 
Some balloon loans only require that you pay the interest
during the loan term, which means monthly payments are often
very low, but at the end of the loan the original balance will
be due in full.  
 
Another type of balloon loan calculates payments as if the loan
were to be paid in full over 30 years, which does reduce the
balance at the end of the term.  
 
Still, this type of loan must be refinanced after the loan term
is up.  Balloon loans can be beneficial if the borrower expects
to resell the house at a profit before the ending balance comes
due.
 
The type of mortgage you select depends largely on your plans
for the house.  Are you planning to live in it long term or
short term?  
 
Do you expect the property to appreciate rapidly?  Keeping your
long-term goals in mind will help you choose the mortgage that
is right for your unique situation.

About The Author: Robert Michael is a writer for
http://www.domusproperty.com which is an excellent place to
find property links, For more information go
to:domusproperty.com