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Mortgage Types

Fixed-Rate Mortgage

For a fixed-rate loan, the interest rate stays the same for the entirety of the repayment. The trade-off is that the interest rate is usually a bit higher than for other types of mortgages. The upside is that with the interest rate and monthly payment being fixed, there is less worry about an increase in outlay.

Adjustable-Rate Mortgage

Often referred to by the acronym "ARM," adjustable rate mortgages have a set interest rate for a set period but the interest rate and monthly payment adjust at later fixed intervals. One appeal of an ARM is that they usually start off with a lower interest rate than a fixed-rate mortgage. Because of this, an ARM can be worth considering for someone who plans to sell the home in a few years or who anticipates a significant income increase. This is a very risky proposition though, since there are no guarantees that a home value will increase in the first few years of ownership, or that expected increases in income will come to fruition.

Interest-Only Mortgage

Again, the initial payment is lower with an interest-only mortgage since you are paying only the interest for a specified amount of time, usually several years. After that time, however, the payment becomes higher because it begins to include both principal and interest. This is another risky type of mortgage since there is no guarantee you will be able to afford the increased payments in the future.

Government Programs

A mortgage loan obtained through a federal government program can in many cases mean less stringent standards for qualifying and money saved in the long-run. The two most popular programs are:

VA Loans - VA loans are insured by the Department of Veterans Affairs and are only available to eligible veterans. No down payment is required.

FHA loans - FHA loans are insured by the Federal Housing Administration, a division of HUD (the Department of Housing and Urban Development). A down payment of at least 3.5% is required.

Many states and cities have programs specifically for first-time homebuyers. They make it easier to buy a home by offering such things as down payment assistance, below-market-rate units, and/or low- interest loans. Contact your local housing authority for information about programs in your area.

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