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Written by: Lance Williams

Several mortgage products are on offer today. The big question arising in the mind of the mortgage seeker is: which is the best bet?

In the various states of the U.S. the interest only mortgages and adjustable rate mortgages (ARMs) have lately been taking the mortgage market by storm. The traditional 30 year fixed rate mortgages have as a result received a setback. The latest offering in the U.S. mortgage industry is the interest only hybrid ARM.

At such a time prudence demands careful scrutiny of such new products which have become a craze. One ought to give a thought to why one should opt for any of these or whether these new mortgage loan types are actually not worth going for at all.

Today’s U.S. market is characterized by home/Real Estate prices soaring and interest rates lying at all time lows. At such a time the interest only loans seem to be the best tool aimed at offsetting the high prices of homes. Thus, interest only mortgages are being aggressively pushed nowadays by the lenders and brokers.

The interest only mortgage product is finding greatest demand in California where home prices are among the highest. It has also been in great demand especially in the markets of New York, Chicago and Washington. However, it may be noted that interest only mortgages are just not for everyone. They are also not quite viable in the long run.

Currently, the home buyers are turning to interest only mortgages because of the home prices zooming upwards. Here, one needs to pay only the interest on the mortgage for a specified period-often for the first 5, 10 or 15 years when there is no need to pay principal. The lower monthly payment is the main attraction of an interest only mortgage.

The borrowers are those with unpredictable incomes comprising largely of commissions or bonuses coming in infrequently and those expecting to earn a lot in a few years time. Interest only mortgages can provide the lowest monthly payments possible for lean, non profitable months. Alongside it will allow one to pay down huge chunks of the principal at times when bonuses are obtained. Using the latest popular interest only mortgages one’s entire payment can also be made tax deductible.

Interest only mortgages were initially meant for the affluent borrowers looking for high priced homes. However, for the past few years it has been approaching a little towards down market. Still it is a fact that when one goes too far downscale then these loans do not save enough money to prove themselves worthwhile. Hence these are not for regular wage earners who take out moderately sized home loans and do not possess any strategy for investing the savings.

There lies an inherent danger regarding interest only mortgages in the expectations of the home buyers. Persons going into interest only mortgage should look at it as interest deductible rent and not assume that they are going to get any money from it. If they do get money then it is to be considered as a bonus.

In case of people who have little or no interest in building up equity in a house-this works well. It is a marked feature of the Real Estate market to go through waves-much like the stock market. If one needs to sell during some unfavorable period of time then one will end up in trouble and losses. The interest only mortgages do not build net worth at all. Even after crossing the age of 75 you will perhaps still go on leveraging without gaining home ownership. This is what makes it unsuitable in the long run.

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Alongside interest only mortgages there is the increase in popularity of the adjustable rate mortgage or ARM. In fact traditional fixed rate mortgage and adjustable rate mortgage have always been the most common mortgage types. An ARM has a fixed interest rate when the mortgage is obtained. The payment is also fixed at the beginning of the loan.

However, both the interest rate and the payments are not fixed for the whole life of the mortgage. On completion of the initial fixed period the interest rate and the monthly payments are both adjusted for reflecting the current mortgage interest rate prevailing at that point of time. The computations required in order to determine the adjustment lies at the discretion of the lender. Each of the lenders may have their own formula and index for calculations.

The adjustable rate mortgage basically comprises of a fixed rate mortgage combined with a floating rate mortgage. At the beginning of the term the mortgage rate is fixed for certain periods (could be for 3, 5, 7 or 10 years). On expiry of this time period the rate becomes adjustable. Some ARMs come with conversion options i.e. they can be converted to fixed rate mortgages established as per some pre-determined formula during a given period.

The ARMs can be the only option available in home loan if the current mortgage rates and housing/Real Estate prices are high. The initial low mortgage rate (also called teaser rate) of the ARMs is used to attract people. An ARM becomes ideal for people intending to stay in their homes up to 5 or 7 years. People who had opted for an ARM when the interest rate cycle was at its peak have to pay lower successive monthly home mortgage payments now since the interest rates have gone down. However, in spite of its several benefits there is a higher risk involved in case of ARM which is the chief drawback of this product.

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Both these new products discussed above have been pitted against the most conservative loan product-a 30 year fixed mortgage. This traditional mortgage product has an interest rate remaining the same for the 30 year term of the loan. This has been the commonly used mortgage plan of all times. From the 1960’s onwards lenders have stretched mortgages from 20 years to 25 years to the current 30 year term to keep afloat the home buying mortgage industry.

This product has got certain advantages because of which it has remained popular through all these years. It offers fixed monthly payments over the life of the loan. The interest rates are locked i.e. they remain fixed over the life of the loan. Moreover, it can refinance in case the rates go down. A ‘longer life’ coupled with ‘lower payments’ characterize this type of mortgage.

However, this is not free from drawbacks. The major drawback is that the interest rate remains fixed over the period of the loan and does not change even if the current industry rates go down. It is because of this rigidness in the interest rate that the ARMs and interest only mortgages have become popular nowadays when low interest rates are prevailing.

Finally, here is a word of advice for mortgage seekers. Though one may have been lured by the low monthly payments of adjustable rate and interest only mortgages, one must never rush. Borrowers need to determine their monthly payments keeping the worst situation in mind before signing for any deal.

About the author:

About the Author - Lance Williams who wrote this article is an accomplished contributing writer presently working in association with mortgagefit.comhe/">http://www.mortgagefit.comHeis a specialist in mortgage and Real Estate.