Buying a home is a bit complicated but is totally worth it at the end of the day. There are many things that you need to be familiar with especially if it is your first-time buying. The first thing to consider is the mortgage. Knowing what type of mortgage is crucial because it can affect your finances for years to come.
With this, it is prudent to take your time and do your homework before you commit. To start, you should consider a comprehensive calculator when shopping for the right mortgage. After that, you need to understand the common types of mortgages so it can help you decide. Here are the common types of mortgages you should know about:
ARM (Adjustable Rate Mortgages)
The ARM is preferred by most with plans to move within a handful of years after purchasing the unit. This type has an adjusting rate a specified time and frequency. Keep in mind that ARM rate is lower than fixed-rate mortgages.
There are two types of ARMs – hybrid and interest only. The hybrid ARM is a combination of fixed rate and adjustable rate. This type has a specified amount of time at the onset of the term and once that time has passed, the rate will adjust. The interest only ARM allows buyers to pay the interest for a certain number of years.
The most common reason why many find ARM attractive is because of the initial rate. It is a popular choice for buyers that only plan on staying in a home for 5 years, which offers an interest rate of 1%. As for the drawback, there is a chance that the interest rate can increase.
30-year fixed mortgage
This is actually the most popular type of mortgage. This mortgage is a loan that has a fixed interest rate for the entire period of the loan. To determine if it is right for you, it is time to get to know their advantages and drawbacks.
The main advantage is the fact that the monthly payments are affordable if you compare it to shorter termed mortgages. Whatever the condition, the rate will not change over the life of the loan. Another advantage is that it can be obtained with a small down payment. Take FHA (Federal Housing Administration) loan, for instance, can be obtained with 3.5% down payment.
The main drawback is the length that you will pay for the interest rate. Another drawback is you tend to pay more on the interest. Since the loan is much longer, there is a risk for the lender. To cope with the risk, they charge higher interest rates.
15-year fixed mortgage
This type of loan is similar to a 30-year fixed mortgage in the sense that the interest rate is set for the length of the mortgage. To determine if it is right for you, it is time to get to know their advantages and drawbacks.
The biggest advantage of this mortgage is the fact that the loan is paid off a lot quicker. Another obvious advantage is the lower interest rates. If you finish early, you will have time to save for retirement or emergency. You can even consider buying a new vacation house. The only drawback is you tend to pay higher monthly payments.