For many families, purchasing a home is impossible without first obtaining a proper mortgage loan, and since it is the most important money commitment, you should try to find the loan that’s good for your situation. An effective way to start is to prepare yourself. Understanding the different types of loans on the market, and the pros and cons of each one is necessary. Make sure you think about how many years you intend to live in your new home, your risk tolerance, and if you expect your salary will increase, drop or stay the same. There are more than a few selections – totally different terms, rates, fees… Here they are:
Adjustable Rate Mortgages (ARM)
With an ARM, the interest rate varies periodically, generally in relation to an index (for instance, the rates that set by Federal Reserve), and monthly payments might go up or down accordingly. Changing periods generally happen at intervals of one, three or five years. On an yearly adjustment, you usually begin with a rate that is two to three percentage points below the price of fixed rate loan.
The following factors can assist you to decide if choosing ARM is good for you
1. You expect to pay-off the loan of your new house at intervals four to five years.
2. You are projecting to be in your home for less than a few years.
3. You need to bring down your payments in the first year.
4. You have enough of confidence that your salary would grow soon.
5. The most crucial factor is that you can handle payments when the rates go up.
Go with a fixed rate mortgage, and you’re safe. The interest rate and monthly payments remain the same for the lifetime of your loan. If rates go up, you have gotten a good deal. How about if they go down? You may refinance at a lower rate.
Consider a fixed rate loan if:
1. You plan to live in your new house for many, many years.
2. You can’t foresee your future salary.
3. You think the mortgage rates will increase shortly.
4. You do not feel safe for taking a chance on an Adjustable Rate mortgage.
These are great loans for folks who are stretching their incomes to buy a home. With these mortgages, you have a fixed rate for a specific number of years (typically 3,5,7 or 10), then the loan will switch over to adjustable rate.
Consider a Hybrid Mortgages if:
1. You are intending to be in your home for just a brief time. The advantage is you will have a fixed rate at a lower monthly payments than the real fixed-rate loan.
2. You believe the present rates are too high, but you don’t want to miss an opportunity to have the house you like.
3. You think that your salary will rise in the near future, so when your rate is changing to ARM does not affect you too much.
Besides Fixed, Adjustable and Hybrid, there are several other types of mortgages (Two-Step , Balloon…) on the market today. It might not be straightforward to select the most effective one for your situation. However, by answering the following questions, you may get a feel for the simplest loan for your financial situation.
1. How many years do you intend to stay in your new home.
2. What do you feel interest rates will do in the future?
3. Do you think to have a big raise coming soon?
4. What is your risk tolerance level?
Finding the best mortgage is all about saving money. You took your time to settle on the right house, shouldn’t you also cautiously evaluate the financing for that home?
You also need to know about Loan Amortization Schedule.