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  Buying a Home

  Types of Mortgage Loans

Fixed-rate loans. Because they offer a monthly payment that is known and does not change, fixed-rate mortgage loans remain the most popular type.

Most fixed-rate mortgages are for loan terms of 15 or 30-years. A 30-year loan has lower payments but a slightly higher interest rate. For all of 2007, the average mortgage rate on a 30-year fixed-rate loan was 6.34%, according to data from Freddie Mac. For 15-year mortgages, the average rate was 6.03%.

To pay off a fixed-rate loan sooner, check with your lender to make sure you can make prepayments anytime and for any amount, and at no penalty.
 
Adjustable-rate loans. After an initial term, the interest rate on an adjustable-rate mortgage loan is re-set periodically. This is to keep the rate in line with current market interest rates. For example, a 3/1 ARM loan offers a fixed rate for the first three years, adjusting once a year thereafter.
 
Convertible mortgage loans. These are ARM loans that allow you to convert to a fixed-rate loan at or before a specified time. The conversion privilege lets you start off with a low variable rate, then lock in when fixed rates drop low enough.
 
Balloon mortgage loans. These loans often have interest-only payments. In this case, you don't amortize any loan principal and the entire loan amount is due at the end of the loan term. A balloon mortgage allows you to minimize your monthly payments until you refinance the loan. Another advantage is that a larger share of your payment may be eligible for the mortgage interest tax deduction.

 

Buying
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