What is a common type of mortgage that has lower initial payments?

An adjustable-rate mortgage (ARM) is often characterized by lower initial payments because it typically starts with a fixed interest rate for a specified period, such as the first five, seven, or ten years. During this introductory phase, the interest rates are generally lower than those of fixed-rate mortgages, making the initial payments more manageable for borrowers. After the initial period, the interest rate on an ARM can change periodically based on market conditions, which can lead to fluctuations in monthly payment amounts.

This feature makes ARMs appealing for buyers who expect their incomes to rise or plan to move before the adjustable period begins, allowing them to benefit from lower payments initially. Borrowers should be aware of the potential for increased payments once the interest rate adjusts, but the lower start can be advantageous for those looking to maximize cash flow in the early years of their mortgage.

While conventional mortgages and fixed-rate mortgages provide stability in payment amounts throughout the life of the loan, they typically do not offer the initial lower payments that ARMs do. Home equity lines of credit (HELOCs) operate differently altogether, functioning more like a credit card backed by home equity rather than a traditional mortgage with fixed or adjustable terms.