Different Mortgages for Different People

Chapter 2. The type of mortgage you choose is the most important decision you will make during the home purchasing process. Let's discuss your options.

This chapter:

  • Introduces the various types of mortgages

  • Describes the benefits and disadvantages of each

  • Helps you decide which type of mortgage is best for you

Most financial experts maintain that choosing the wrong type of mortgage is the single biggest money losing mistake the average person makes in her lifetime.

By taking time to understand your choices you can make an informed decision, and save thousands over the life of your loan.

In the following pages we'll examine fixed rate mortgages (FRMs), adjustable rate mortgages (ARMs), and special mortgages for those with particular needs.

The second part of this Mortgage Basics Guide describes what goes into your mortgage package such as points, insurance, etc.

But let's first explain the difference between the most common types of mortgages:

Mortgages are divided into two basic types, fixed rate (FRMs) and adjustable rate (ARMs). The interest rate on an FRM never changes, while the rate on an ARM changes along with a pre-determined index rate.

Some mortgages are actually a combination of the two, with a fixed period followed by an adjustable period. These are fairly new, but are rising in popularity and can be a very good option, depending on your situation.

Another big difference between types of mortgages is how they are amortized, or how the interest is calculated and spread over the life of the loan. Different amortizations will have a huge effect on how much interest you pay and when you pay it.

Next: An in-depth look at fixed rate mortgages (FRMs)

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