There are various types of mortgages that are best suited for certain people.  Understanding what each offers is important in determining which kind to take out.  Let’s take a look at a glimpse of each of the possibilities.

30-year Plan
The benefits a 30-year fixed rate mortgage offers is lower monthly payments, an increase in the amount of taxes you can deduct each year and the opportunity to buy a bigger home.  The downside to this is that you will be paying much higher interest rates compared to the 15-year mortgage and thousands more over the life of the loan.  Furthermore, it will take much longer to begin building equity on your home since for the first several years you will be paying the interest only.

15-year Plan
The 15-year plan has lower interest rates than the 30-year plan leading to a dramatic change in savings over the course of the mortgage.  You will also start to build equity much sooner due to this.  On the other hand, monthly payments are significantly higher.  Because of this, you probably will not be able to buy as big a home as you would with a 30-year plan since you need more money up front.

Adjustable Rate

Adjustable rate mortgages, also called ARMs, vary as interest rates rise and fall.  The good thing about adjustable rate mortgages is that interest rates and monthly payments start out low.  Also, when interest rates drop the process is automatic and there is no need for extra paper work to adjust the loan.  This is typically ideal for those who do not plan to live there for a long time.

The disadvantages to adjustable rate mortgages are that although it starts off with lower interest rates, they can increase over time to very high rates.


Two-Step Mortgages

In a two-step mortgage there is an initial fixed rate for the first few years.  After you have gotten a chance for your credit to improve, the interest rate is usually lowered and the remainder is paid at that fixed rate.  Two common two-step mortgages are the 5/25 and 7/23.  This means after the first five years the interest rate of the mortgage will be adjusted and will remain the same for the next 25 years, the same goes for the 7/23.

The advantages to the two-step mortgages are that you can get the best of both worlds; you can get the initial low interest rates ARMs offer, as well as the stability from fixed rate mortgages.  You can qualify for higher amounts and pay lower monthly rates.  If interest rates decrease by the time your adjustment comes around you could save tons.  You could also save tons is you decide to sell or refinance before the second period.  On the other hand, if interest rates rise it can be more costly to you in the long run.

There are several other types of mortgages including Subprime, Balloon, etc.