When buying a home, most individuals take out a home loan known as a mortgage to assist with paying for the property. Though the 30-year fixed-rate mortgage remains one of the most popular choices, there are actually numerous loan choices available. Here are a few different types of home mortgages that you may not know about.
1. The 40-Year Fixed-Rate Mortgage
A 40-year fixed-rate mortgage is comparable to the 30-year fixed-rate mortgage, but it extends the life of the loan by 10 years, lowering the amount of your monthly payment. The interest rate for a 40-year mortgage tends to be higher than the rate for a 30-year loan; the longer the term of the mortgage, the more time the debtor has to potentially default on the loan. You can expect the lender to account for this increased risk by requiring a higher rate of interest.
Some individuals opt for a 40-year mortgage because they're concerned about their ability to comfortably pay for all of the expenses associated with purchasing a home. Or, if they live in an area with a thriving real estate market, perhaps they're worried that if they wait to become homeowners they won't be able to afford to purchase a home. Instead, they look for an option with a low payment.
One potential drawback to a 40-year mortgage is that you'll pay more interest over the life of the loan than you would for a mortgage with a shorter term.
2. An Interest-Only Mortgage
An interest-only mortgage requires you to only pay the interest on the loan for a specific period of time (usually five to ten years). After this interest-only period ends, the payment will increase so that you begin paying down the principal in addition to the loan interest.
Interest-only mortgages aren't typically used by individuals purchase homes for personal use; rather, investors who only plan to own a property for a short period use these loans to minimize their home expenses.
If you hold the loan until the interest-only period ends, you should be prepared for your payment to dramatically increase. Since the principal balance remains the same during the interest-only period, it's easy to become upside-down on the home (owe more than it's worth), especially if the real estate market in your area declines.
3. Graduated Equity Mortgages
Graduated equity mortgages increase their payments over time. The payments start small, and over the course of the loan, they increase. This loan is a good fit for individuals who believe their income will substantially increase in the future (like students or households who currently have a stay-at-home parent). A portion of each payment goes towards your home's principal balance, allowing you to make some progress paying down your loan balance, even in the loan's early years.