There are a variety of mortgage loans that are available to homeowners who want to purchase a home. It’s important to be aware of the various loan options so that you can make the best decision based on your long term goals and the monthly payment you can afford. Here are the top five mortgages to be familiar with.
Fixed Rate Mortgage
A fixed rate mortgage is exactly as it sounds; your monthly payment will be fixed over a period, generally 30 years, although you can take out a fixed mortgage for 15 or 10 years. The interest rate does not change over this time, which makes this mortgage the safest, most popular choice. In fact, fixed rate mortgages account for 75 percent of all loans. Their greatest advantage is that the homeowner knows exactly what their monthly payment will be.
Some homeowners worry that by taking out a fixed rate mortgage, they won’t be able to take advantage of lower interest rates if the rates do go down. The good news is that with a fixed rate mortgage, the homeowner can refinance. The only stipulation is that the homeowner has to pay closing fees. Although fixed rate mortgages are predictable and widespread, they do have higher interest rates than with other loans.
The first payments will go mostly toward interest, providing you with a better tax break early on. As time passes however, more of your payment will go toward the principal instead of the interest. Nevertheless, your payment will always stay the same. Fixed rate mortgages are best for borrowers that intend to stay in their homes long-term and appreciate the stability of fixed monthly payments.
One Year Adjustable Rate Mortgage
A one year adjustable rate mortgage has an interest rate that fluctuates based on the market. The advantage to this loan is that the interest rate is lower than what you pay for a 30 year fixed mortgage. Also, homeowners can qualify for a larger loan amount while having a smaller monthly payment, allowing them to get a more valuable home for less.
The drawback to a one year adjustable rate mortgage is that the loan is unpredictable. One year a homeowner may be paying a small mortgage, but the monthly payment can skyrocket the next. Each year on the anniversary of the loan, the payment changes according to a specific schedule that occurs after the fixed period at the beginning of the loan.
For some borrowers, an adjustable rate mortgage is a great option, even though it’s not as steady. If you’re someone that needs the lowest possible payments over the term of your loan, planning on transferring over your home in the near future or require the flexibility of loan terms, an adjustable rate mortgage may be a great choice for your situation. Also, you can pay off the principal of your loan without being faced with prepayment penalties.
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