What Type of Mortgage is Best?
When looking to purchase a home, homebuyers will have the option of selecting from a variety of mortgage loans. We will touch on some of the more common here. There are distinct advantages and disadvantages to each type of loan, and homebuyers must consider their ultimate goals, current market conditions, stage of life and credit strength. In buying a new home, a person might consider how long he or she might stay in the home, for example. Other considerations may include a potential need for future family growth so as to put off a need for a new home. The answers to these questions as well as answers to several other questions, can help you decide whether a 30-year, 15-year, loan is best and whether a fixed rate is preferable or potentially an adjustable rate mortgage (ARM) may be best.
Fixed Rate Loans
There are a variety of benefits of fixed rate loans. Foremost, fixed loans offer the benefit of knowing exactly what your monthly payment will be for the mortgage throughouth the life of the loan. The most common fixed mortgages are 30-Year and 15-Year terms.
A 30-year Mortgage
The most popular mortgage is a 30-year fixed loan. The interest rate is fixed for all 30 years of the loan. There are no real surprises with a fixed rate mortgage. The lender cannot adjust the interest rate several years down the road. Many people like the security knowing that their house payment will never change. The disadvantage to a 30-year fixed rate mortgage is when interest rates fall. A homeowner is stuck with a higher rate mortgage. Generally, the 30 year fixed rate loan will have a slightly higher rate of interest than a shorter term loan such as the 15 year fixed rate loan.
The 15-year Mortgage
A 15-year mortgage is similar to a 30-year loan in that it will feature a fixed interest rate and a fixed payment. The advantage, of course, is that a homeowner will end up paying off his or her home much quicker. One benefit is a slighlty lower interest rate than the 30-year fixed rate loan. One potential problem for some, especailly first time huyers can be the size of the payment whihc can limit the size of the home purchased. Since the loan is amortized for just 15 years, the payment will be much larger than that of a 30-year loan. Also, interest rates could fall during the 15-year period and, just as with a 30-year loan, a homeowner is stuck with a higher interest rate.
Adjustanble Rate Mortgages (ARM’s)
ARMS’s are also referred to as variable rate loans or mortgages and they come in may variations, some even mixing components fo variable and fixed rate structures. One key component is that in general they will have lower interest rates that fixed rate loans, at least initually. The rate of interest is generally tied to one of several index used to track interest rates such as the Federal Funds Indec or the LIBOR (London Bank). A key benefit of these loans is that they generally will allow borrower to qualify for more home (higher price). This can allow a young family to buy enough house to allow for their future growth as more children are brought into the picture. A risk is that with currently low rates, odds are rates will increase in future years at some point. The flip side of the coin is that while rates may rise, the family’s earnings are also likely to rise as they gain experience and tenure in their employment and earning capacity. Another strategy is to use the variable rate loan to allow a lower payment early on and allow extra payments to principal to build equity on the starter home, resellind when the need arises for a larger family and have the equity for a larger down payment. There are a variety of Variable Rate Loan types
The 5-year ARM
The 15- and 30-year mortgages are for people who plan on staying in their homes for a long time. Most homeowners spend an average of nine years in a home before selling. As a homeowner, if you know that you may only be staying in a home for a short period of time, a 5-year adjustable rate mortgage may be a viable option. The interest rate in this type of loan will remain fixed for the first five years but will adjust in the years after. The big disadvantage, of course, is after the first five years a homeowner could see a house payment rise significantly with the adjustments of interest rates.
For more information on mortgage type or to buy or sell your home give us a call at (210) 399-8585 or check out our main site at www.iClosehomes.com