Mortgage Calculators and Types of Mortgages

There are a variety of mortgages available to home buyers and those who already own a home and wish to refinance.  With the vast array of mortgages available it is important to consider all options before applying for a home loan.  Mortgage calculators easily assist in the process of evaluating multiple mortgage products.  The interest rates on the various loan types should be considered along with the costs and the advantage and disadvantages that may come with each product type.  Home loans can vary in term, how the interest rate is determined, and the payment features.  The mortgage calculators can calculate the advantages and disadvantages of each of these features.

Fixed Rate Mortgages

A mortgage in which the interest rate remains the same throughout the entire life of the loan is a fixed rate mortgage.  The interest rate doesn’t change for a predetermined amount of time.  These mortgages are the most popular home loans.  They usually come in terms of 30, 15, or 10 years.   A mortgage payment calculator can quickly evaluate the different payments for each term as well as the difference in interest rate.  Though there may not be much of a difference, usually loan terms that are longer have a higher rate than shorter term loans.

The biggest advantage of having a fixed rate mortgage is that the homeowner knows exactly when the interest and principal payments will be for the length of the loan.  This allows the homeowner to budget easier because they know that the interest rate will never change for the duration of the loan.

Adjustable Rate Mortgages

An adjustable rate mortgage differs from a fixed-rate mortgage in many ways.  With a fixed-rate mortgage, the interest rate stays the same during the life of the loan.  With an adjustable rate mortgage, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.  For assessing the payment amount and the impact of rate changes for these loans, the adjustable rate mortgage payment calculator is simple and easy to use tool. 

To compare two adjustable rate mortgages with each other or to compare an adjustable rate mortgage with a fixed-rate mortgage, you need to know the index the loan interest is based on, the margin that is added to the index, the discounted rate or start rate, caps on the interest rates and payments, negative amortization features, payment options, and recasting of the loan.  The mortgage payment calculator should be used here to asses both the initial payment of the loan and the outcome if and when rates go up and down in the future. 

The ability to change the parameters of the on the adjustable rate payment calculator makes it a great tool to compare different adjustable rate loans that are based on different indexes as well as to take any adjustable rate mortgage and recalculate the payment based on changes in that index.  It can be very important for any borrower to consider the maximum amount your monthly payment could increase.  Equally important, a borrower needs to know what might happen to the monthly mortgage payment in relation to their future ability to afford higher payments.

The rate on adjustable rate mortgages is usually lower than a fixed rate mortgage.  This makes the adjustable rate mortgage more affordable than a fixed-rate mortgage for the same loan amount in the short term.  In addition, your adjustable rate mortgage could be less expensive over a long period than a fixed rate mortgage for example, if interest rates remain steady or move lower.  Of course, the opposite may also happen, where rates rise and the payment o the adjustable rate mortgage increases as well.  The mortgage payment calculators should be used thoroughly to prepare for such outcomes.

Hybrid Adjustable Rate Mortgages

Hybrid adjustable rate mortgages are most often marketed as 3/1, 5/1, 7/1 or 10/1 adjustable rate mortgages.  These loans are a mix or a hybrid of a fixed rate loan and an adjustable rate loan.  The interest rate is fixed for the first few years of these loans for example, for 5 years in a 5/1 ARM.  After that period, the rate usually adjusts annually until the loan is paid off.  In the case of 3/1 or 5/1 ARMs the first number declares how long the fixed interest rate period will be and the second number tells shows how often the rate will adjust after the initial period.  In addition to these adjustable rate mortgage products there are also 2/28’s or 3/27 ARMs.  In these cases, the first number identifies how long the fixed interest rate period will be, and the second number identifies the number of years the rates on the loan will be adjustable.  Some 2/28 and 3/27 mortgages adjust every 6 months, not annually.  The mortgage payment and mortgage term calculators work well at evaluating the difference in the hybrid loans from a payment perspective

It is very important to understand these features and assess the impact they will have on your budget and monthly payment.  Furthermore, in order to calculate the advantages and disadvantages of different home loans it is essential that all information is ascertained about the individual loan product.  Mortgage comparison calculators, mortgage term comparison calculators and mortgage payment calculators can all be used to explore the facts about theses loan types.  

Interest Only Features

An interest only loan payment plan allows the borrower to pay only the interest for a specified number of years, typically between 3 and 10 years.  This allows the borrower to have smaller monthly payments for a period of time.  Once the interest only option period ends, the monthly payment will increase, even if interest rates stay the same, because the borrower must start paying back the principal as well as the interest each month.  For example, if you take out a 30-year mortgage loan with a 5-year interest only payment period, you can pay only interest for 5 years and then you must pay both the principal and interest over the next 25 years.  For some interest only loans, the interest rate adjusts during the interest only period as well.  This feature is found on adjustable rate mortgages that have an interest only option.  Interest only options may be available on fixed rate loans and adjustable rate loans.  The longer the interest only period, the higher your monthly payments will be after the interest only period ends.  An interest only mortgage calculator will show the differences in payment with the interest only feature.

Balloon Payment

Some mortgage loans require a lump sum payment when the loan term ends.  This is a feature of a balloon payment mortgage.  This feature can come about when the loan conditions allows the borrower to make set number of payments until the very end of the loan when the remaining balance is due all at once.  A balloon payment will be a much larger payment compared with the other monthly payments that are made on the loan. The mortgage payment calculator can be used to calculate the payment and a mortgage amortization calculator can be used to calculate the balance of the loan that will be remaining or that balloon at the end of the term.

Balloon mortgages last for a much shorter term and work a lot like a fixed rate mortgage. The monthly payments are lower because of a large balloon payment at the end of the loan. The reason why the payments are lower is either because it is the only interest that is being paid monthly up until the balloon payment or the rate is lower because the mortgage company offers a slightly lower rate for the shorter term. The terms of these loans are generally set by calculating the payment over a 30 year period but include a provision that’s states the loan has to be paid off in a shorter time period.  A 5 year balloon loan will have the payments calculated over a 30 year period but at the end of 5 years the remaining balance is due.  A mortgage amortization calculator may be used to gauge the balloon payment features in more depth.

Balloon mortgages are great for responsible borrowers with the intentions of selling the home before the due date of the balloon payment.  However, homeowners can run into big trouble if they cannot afford the balloon payment, especially if the borrower intended to refinance the balloon mortgage and the market changes or the borrower’s financial condition changes.  On home loans that have these types of exacting features, a mortgage calculator should be used to adequately explore all options.

This entry was posted on Friday, December 12th, 2008 at 1:33 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.