Mortgage Information Center

Loan Type-Fixed-rate, adjustable-rate, ballon

Borrows may choose a fixed-rate mortgage, an adjustable-rate mortgage, or a balloon mortgage.

A fixed-rate mortgage is one in which the interest rate remains the same for as long as you have your loan. If yoiu expect to live in your home for many years, having the same interest rate may be a primary concern.

An adjustable-rate mortgage (ARM) has an interest rate that can move up or down as market conditions change. An ARM often starts out with a lower interest rate for a certain period of time, after which your mortgage payments may change periodically (for example, once or twice a year). Interest rate changes typically are subject to two caps (limits), one for each adjustment period and one for the life of your loan. For example, a typical ARM that adjusts annually may have a per adjustment cap of 2 percentage points and a life-time cap of 6 percentage points. If you're confident that your income will increase steadily over the years, or if you plan to move in a few years and aren't concerned about potential rate increases, you may want to consider and adjustable-rate mortgage.

Balloon mortgages typically offer lower interest rate for shorter-term financing, usually seven years. At the end of this term, you have the option to refinance the mortgage for the remaining term or pay off the outstanding balance with a lump-sum payment. If you anticipate selling or refinancing your home in a few years, a balloon mortgage may be right for yoiu. If you are considering a balloon mortgage, you may want to ask about and understand all the conditions you will need to refinance your loan at the end of the balloon term.

Research has shown that balloon mortgages, and adjustable-rate mortgages that change interest rates once a year or more, tend to be higher risk for default than mortgages with longer fixed payment periods.

Self-Employed Borrowers--owners or part owners of a business

A self-employed borrower is either the owner or part owner of a business who generally has some control over the income that is earned from the business. The business may be a sole propprietorship, a partnership (general or limited), or a corporation.

Because of the increased chance of uneven cash flows, self-employment introduces an additional layer of risk to a mortgage loan application that is not present with salaried borrowers. This additional risk is generally consedered adverse only when a self-employed borower has other high-risk factors associated with his or her loan, such as a history of delinquent accounts or a low level of savings.

© Systems Engineering, Inc.