The Pros and Cons of Mortgage Types

If you've been in the market for a mortgage for a while, then you've probably heard a lot about the different types available to you. Trying to decide between a fixed, adjustable, balloon, and hybrid type of mortgage can be a difficult task for anyone. At Wisconsin Mortgage Loans, we want our visitors be well prepared for their purchase, which is why we've included this handy reference guide to the different mortgage types:

Adjustable Rate Mortgages

An adjustable rate mortgage typically has an interest rate that can go up or down based off of current market conditions. These type of mortgage loans usually carry a low interest rate at first, but after adjusting, it can greatly increase.

• Pros - Perhaps the greatest advantage of an adjustable rate mortgage is that they have low interest rates at first. That makes them an appealing option to first time home buyers who might struggle with making payments initially.
• Cons - As you could probably guess, the cons associated with an ARM are that the interest rate is sure to go up over time. Naturally, that can lead to larger monthly payments, which many people have difficulty making if they are not prepared.

Balloon Mortgages

A balloon mortgage works by having a fixed interest rate, but the loan itself generally only lasts for 3-10 years. After that period, the entire amount of the mortgage is due.

• Pros - Balloon mortgages often have some of the lowest fixed interest rates available. This type of loan makes sense for those that expect to have a large sum of money available upon the loan's maturity date.
• Cons - Some people are unprepared to pay off their entire mortgage after only 10 years, which could lead to foreclosure if they are unable to refinance. Even for those that can refinance, they'll likely be stuck with a much higher interest rate.

Fixed Rate Mortgages

Like the name implies, a fixed rate mortgage has an interest rate that never changes. They can last anywhere from 5-30 years and are generally considered the safest option.

• Pros - A fixed rate mortgage allows you to prepare your budget for the long term, since you'll know that your interest rate and monthly payments will never change over time. According to our experts at Wisconsin Mortgage Loans, a fixed rate mortgage should be everyone's goal.
• Cons - Probably the biggest disadvantage associated with fixed rate mortgages is that their interest rate can appear high at first. Also, fixed rate mortgages can be more difficult to get approved for than other types.

Hybrid Mortgages

A hybrid mortgage is something of a combination of both fixed rate and adjustable rate mortgages. They have a fixed rate period, usually 5-10 years, after which it is converted into an adjustable rate.

• Pros - The long fixed rate period is good for homebuyers who want to plan their budget out several years in advance.
• Cons - Just like an adjustable rate mortgage, there's a good chance that the interest rate and monthly payments will increase over the life of the loan.