Understanding the Different Types of Mortgages & Choosing the Right One for You
Understanding the Different Types of Mortgages & Choosing the Right One for You
Whether you’re looking to buy your first home, an investment property or a second home, choosing the right mortgage is important. You need to know about loan terms, interest rates, borrower qualifications and more.
You can use this mortgage calculator to estimate your monthly payments and determine which type of loan will work best for you.
Fixed Rate Mortgages
Fixed rate mortgages are a popular choice for homebuyers because of their stability in monthly payments. These loans typically have terms of 15 or 30 years and are a good option for lower-risk borrowers who need a bit of security in their finances.
During the early years, most of your payment goes toward paying down the principal, but over time, youll start to pay more towards interest charges and less toward building equity in your home. This makes it easy to budget and plan for your future because youll know exactly how much money youll need to save up each month to repay the loan at the end of its term.
However, if you decide to refinance after a few years, your interest rate may go up again. This is why its important to carefully weigh the advantages and disadvantages of both fixed-rate and adjustable-rate mortgages before making a decision that works best for your situation.
In addition to having a higher initial rate than a fixed-rate loan, an ARM often comes with an introductory period of fixed interest rates that can last for 5, 7 or 10 years. After the introductory period is over, your interest rate will change depending on market rates, which can be quite unpredictable.
To help protect you from significant changes in your interest rate, most ARMs have a cap that restricts how much your rate can rise during each adjustment or over the life of your loan. This can be useful if youre planning to sell your home in a few years and want to keep your interest rate as low as possible.
Ultimately, the right type of mortgage is one that will work best for your personal financial situation and your long-term goals. Before you decide, take a look at your budget and other factors like how long you plan to live in your home. You can then use a mortgage calculator to figure out the most affordable monthly payment option for you. Youll also need to consider whether a shorter or longer mortgage term would make the most sense for your lifestyle and family.
Adjustable Rate Mortgages
Adjustable rate mortgages (ARMs) are a popular choice for home buyers. They allow borrowers to enjoy lower payments and more buying power than they could with a fixed-rate mortgage, but their rates can fluctuate with the market. This type of mortgage also comes with its own unique set of pros and cons, so its important to know what to expect before you apply for one.
ARMs often start with an initial period of fixed interest rates, which may last up to 10 years or more, depending on the type of ARM you have. After that, the interest rate is subject to changes based on the index used by your lender.
Some ARMs have an adjustment cap that restricts how much your interest rate can rise at any one time, while others have lifetime caps that limit your maximum rate to a specific percentage. Both types of caps help to protect you from unexpected higher mortgage payments.
However, if you choose an ARM with a lifetime cap, you will be locked into your current rate until the loans term expires, which can make it difficult to refinance before then. Moreover, your lender may charge a prepayment penalty if you decide to refinance or sell your property before your adjustable rate mortgage is fully paid off.
For this reason, if you think you might be moving soon or if your homes value is likely to decrease, it might be better to take out a fixed-rate mortgage. And if you plan on staying in your house for a while, you might want to consider a 30-year fixed-rate mortgage to lock in your current mortgage payment.
Whether youre looking to buy a new home or refinance your existing property, we can help you find the right mortgage for your needs. Simply enter your ZIP code to get started on a personalized lender match today!
Whether you are buying your first home or your fifth, a mortgage is an essential part of the home-buying process. And the right mortgage for you depends on many factors, including your credit score and financial goals.
Interest Only Mortgages
An interest-only mortgage is a loan that allows you to forego paying off the principal portion of your home loan during a certain period usually between five and ten years. After that time, your loan will convert to a mortgage that requires you to make payments toward both interest and principal each month. This conversion can lead to a big increase in your monthly payment amount, so you should plan ahead and understand what the change will mean for your budget.
In many ways, interest-only mortgages are a niche product, designed for borrowers who have strong finances and a clear plan for saving. For instance, you may be a student in school or completing a residency and on a tight budget while waiting to enter the workforce, or you might have a career goal that would require you to invest more money in a specific area of your life.
If you have strong income and savings and can exercise extreme self-control, an interest-only mortgage could be a good way to own your dream home without having to worry about making large principal payments in the future. But it’s important to keep in mind that you won’t build up much home equity during the interest-only phase unless you refinance or sell your property before the loan term ends.
Moreover, the high total interest costs you’ll pay during the initial phase can significantly add to your overall financial burden. This is especially true if you have a high debt-to-income ratio (DTI) and are trying to get approved for a higher-priced home that’s beyond your current budget.
It is also important to remember that most interest-only loans are adjustable rate mortgages (ARMs), meaning that your interest rates can fluctuate based on changes in a benchmark funds rate. This can cause your monthly mortgage or home equity line of credit (HELOC) payments to increase, so it’s a good idea to find a loan that lets you lock and unlock interest rates so that you know exactly what your payments will be in the future.
Despite the high upfront costs and risks, an interest-only mortgage can be an ideal option for homeowners who are confident they will pay off the loan before the introductory period ends and don’t mind trading higher payments later in exchange for lower payments early on. It can also be a good choice for people who are confident they’ll be able to refinance or move before they have to start paying principal and interest.
Interest Only Home Loans
Interest-only mortgages are a type of mortgage where you pay only the interest for a specified period of time. They offer the opportunity to make a lower initial payment than conventional loans and give you more time to save up for higher payments after the interest-only period ends. But these loans also carry a few trade-offs, so you need to consider your personal financial situation and risk threshold before choosing one for yourself.
The best candidates for an interest-only loan have a reliable source of income with enough cash flow to cover the monthly mortgage payment after the interest-only period ends. This type of borrower typically wants to keep their housing costs low and is confident they will be able to refinance or sell their home before its necessary to begin repaying both the interest and the principal portion of the loan.
Those with less reliable sources of income should avoid an interest-only loan because the payments may be too high to comfortably afford. They could end up losing the house to foreclosure or having a hard time qualifying for a new loan with higher rates, so they should choose another type of mortgage instead.
If you can afford to make extra payments during the initial interest-only phase, applying those funds toward the outstanding mortgage principal will reduce the overall payment amount and help you start building equity faster when your loan converts to a traditional amortized mortgage. Once the loan converts to the amortization phase, your payments will increase based on the amount of the outstanding balance and the current interest rate.
In addition, the value of your home might decrease during the interest-only period or when you eventually convert to an amortized loan. This is because the interest-only period was often a key part of the run up in housing prices before the 2008 crash, and many homeowners who held these loans found they made big payments on homes they couldnt afford when home values started falling.
These loans are a niche product and most lenders wont offer them. However, they are available from a few lenders and can be a good option for those looking to keep their housing costs down while getting the chance to build equity in their homes later on. But only if you have the financial means to meet the underwriting requirements and can qualify for a larger loan with a lower interest rate.
