The Different Types of Mortgages

 

If you are in the market for buying a new home, you may be curious about the different types of mortgage (also known as a home loan) options available to you. The main types of mortgages are adjustable rate and fixed rate – however there are many different subsets of these mortgages, and some may be more or less suited for your particular needs.

What Do I Need to Know Before I Get a Mortgage? You should have a clear idea of your monthly income, expenses, and a general idea of the price of the house you are able to afford. This will be largely based on the amount of money you have saved for a down payment and your estimated monthly mortgage payment, taxes, and insurance costs, which many financial experts say should not exceed 28 to 30 per cent of your monthly income. Most borrowers should be prepared to mortgage 80 to 90 per cent of the home’s value, and also be prepared for a 10 to 20 per cent down payment.

 The Basic Mortgage types. As stated above, there are two main kinds of mortgages to choose from: fixed rate and adjustable rate. A fixed rate mortgage means that the interest rate that is charged on the amount you are borrowing will stay the same for the entire time you hold the loan. An adjustable rate mortgage (also known as an ARM, or a variable rate mortgage) is one where the interest rate can fluctuate over time, depending on the general level of interest rates in the overall economy.

Positives and Negatives of a Fixed Rate Mortgage. The greatest benefit of a fixed rate mortgage is the fact that the interest rate, and therefore, the monthly payment, will never change! This is a huge benefit, especially in uncertain economic times. A steady mortgage payment will allow you and your family to budget appropriately over the long term without surprise jumps in the amount you owe on a monthly basis. The only possible negative is that because a fixed rate mortgage is usually such a good deal for the borrower, and most mortgage loans are repaid over a long time period such as 30 years, the lender can end up losing money on the deal in the long term, especially if interest rates rise considerably and they could have earned more money on a higher rate elsewhere. So, as a result, many fixed rate mortgages will be offered at a higher starting rate than what other loans may be available for, in order to make up for the anticipated future shortfall the lender may experience. However, if you are planning on staying in a home for a long time, the fixed rate is usually the best deal.

Positives and Negatives of an Adjustable Rate Mortgage. While an adjustable rate mortgage’s interest rate may fluctuate over time, many of these loans are available with an introductory fixed rate. For example, for the first 3, 5, or 7 years, the loan may have a fixed rate, which will then adjust in the year when the adjustable period begins. The advantage of an adjustable rate mortgage is that unlike a permanent fixed rate loan, the interest rate is usually lower to begin, which make it a great option if a homebuyer knows they will be in the house only for a few years. However, there is a danger than economic conditions could change and if the home owner is unable to sell the house or decides to stay longer, when the loan converts to the adjustable rate period – the rate could jump up much higher than before – and as a result, so will the monthly mortgage payment. For some homeowners, this may not be a problem, but more often than not, unpredictable swings in interest rates, particularly upwards, can cause a grave financial burden on consumers. So it is with great caution and forward thinking that a homebuyer should choose an adjustable rate mortgage.

Thursday, March 4th, 2010 financial Info

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