UPDATED 1/26/21
Finding the perfect home can be a long process. You have to schedule a bunch of viewings, attend plenty of open houses and weigh the advantages and disadvantages of each house before you find the one that meets all of your requirements. The process of choosing a home mortgage is (or should be) similar in that you take your time and look at all of your options before settling on one. It is smart to have an idea of what types of mortgages are out there before going out to lenders looking for a loan. Here are three of the most common types of mortgages that homeowners go with:
- Fixed Rate Mortgages – A fixed rate mortgage is one that keep the same interest rate throughout the duration of the loan period. The homeowner makes the same payments each month without having to worry about how the state of the economy will affect their rate. Fixed rate loans are often considered one of the best mortgages for new homebuyers, and about 75% of home loans are fixed rate. These home loans can last for a duration of 30, 15 or 10 years, but the 30 year option is by far the most popular. A fixed rate mortgage is one of the best home loans for people who want to be able to budget their finances every month because there will be no surprises on their mortgage payments.
- Adjustable Rate Mortgages – Unlike fixed mortgages, the interest on an adjustable rate mortgage, or ARM, fluctuates throughout the term of the loan. Homeowners can choose different types of ARMs, including a hybrid that contains aspects of a fixed rate loan. With a five, 7 or 10 year ARM, the interest rate remains the same for the specified time period and then adjusts when this period is over. Usually, ARMs have lower initial rates because of the risk involved, giving the homeowner a good deal for at least the first few years.
- Interest Only Mortgage – This type of loan does not require the homeowner to pay any principle in the first few years. All they have to pay initially is the interest on the loan. Interest only mortgages are ideal for people who may not be making a ton of money at first, but expect a major increase in income over the next five or so years. They can be risky, because after the designated period of interest-only payments is complete, monthly payments can increase dramatically. People living on a tight budget should not choose an interest only mortgage.
When you want to buy a house, it’s time to shop for a mortgage. It can be scary to shop for one, as the terms can be so different from one lender to another. If you need a zero down loan, there are some of those available, especially for first-time homebuyers. If you aren’t sure about area mortgage rates, look for them online so that you can compare the basic rates and the terms each lender has for its mortgages. Are mortgage rates fixed? They can be if you ask for those terms. Many people find that mortgages with variable rates can get unpredictable quickly.
Are mortgage rates good right now? The rates right now are some of the best in decades. The rates are so low that many people are buying houses that are more than they would have been able to afford a few years ago. It’s a great time to get a mortgage for the house of your dreams. Are reverse mortgages a good deal? They can be for those who are retired and have little income but a lot of equity in their houses. The reverse mortgage can take money from that equity and pay the homeowner with it.
Knowing the different types of mortgages that are available for a home loan allows homeowners to compare mortgages and decide which is best for their particular situation. Just as you wouldn’t choose the first house you look at, it’s not a good idea to choose the first mortgage you look at. Look at your options and your finances and make an informed decision. Refernce materials.