An adjustable rate mortgage (ARM) is a common type of new home mortgage. Because of the nature of the mortgage, it allows people who would not be eligible for a mortgage loan under a fixed rate or standard mortgage to be approved for a mortgage loan. It also allows borrowers to obtain a much larger loan than would be acceptable under a standard loan. It provides for a mortgage interest rate that starts out lower than standard and can be increased over the following months or years to a much higher interest rate.
A new home mortgage with a balloon payment is one in which the rates are usually fixed for a period of two to four years, at which time the entire balance become due and payable. It is expected that there will be a new mortgage or refinance negotiated at that time which will take into consideration any significant change in interest rates. A possible disadvantage to this type of mortgage is when the creditworthiness of the homeowner has changed significantly, making it difficult or perhaps impossible to qualify for the new loan at the time of the balloon payment due date.
A recently used type of new home mortgage is known as negative amortization or sometimes Option ARM (Adjustable Rate Mortgage). This type of loan works well when the individual has variable income that fluctuates during various seasons or times so that the income is not fixed. With an Option ARM, the mortgage payment is set at a rate that is the lowest common denominator, so to speak. When income increases, the borrower can pay more than the minimum payment so that the loan balance drops. Otherwise, the loan balance continues to increase in spite of the monthly payment.