For many people, purchasing a home is unachievable without first obtaining a proper loan, and since it is the most important monetary commitment, you should try to find the right mortgage for your circumstances. A right way to start is to prepare yourself. Knowing the different types of mortgages available for you, and the pros and cons of each one is important. Make sure you consider how many years you expect to live in your new home, your risk tolerance, and if you expect your wages will grow, fall or remain unchanged. There are more than a few choices - different terms, rates, fees... Here they are:
Adjustable Rate Mortgages (ARM)
With an ARM, the interest rate varies periodically, mostly in relation to an index (for instance, the rates that set by Federal Reserve), and monthly payments may go up or down accordingly. Changing periods regularly happen at intervals of one, three or five years. On an annual adjustment, you normally begin with a rate that is two to three percentage points below the price of fixed rate loan.
You should get an ARM if:
1. You expect to pay-off the loan of your new home at intervals four to five years.
2. You are projecting to stay in your home for less than a few years.
3. You want to decrease your payments in the first year.
4. You are believing that your income will rise.
5. And here is the foremost important factor, you'll be able to handle payments when the rates climb up.
Fixed-Rate Mortgages
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 climb, you will have a good laugh at them. How about if they drop? You may refinance at a lower rate.
Consider a fixed rate loan if:
1. You will stay in your house for more than ten years.
2. You are close to retirement which means that your earnings maybe lower.
3. You predict that rates are likely to travel up.
4. You would love the safety of having an unchanged monthly payment.
Hybrid Mortgages
As the name implied, a Hybrid Mortgage is a combination of Fixed and Adjustable rates. With these mortgages, you have a fixed rate for a specified number of years (normally 3,5,7 or 10), then the mortgage will convert over to adjustable rate.
Consider a Hybrid Mortgages if:
1. You will stay in your new home for only a few years. The benefit is you will have a fixed rate at a lower monthly payments than the real fixed-rate mortgage.
2. You think the current rates are too high, however you don't want to lose a chance to have your dream home.
3. You think that your salary will rise in the near future, therefore when your rate is changing to ARM doesn't bother you too much.
Besides Fixed, Adjustable and Hybrid, there also are many different types of mortgages (Two-Step , Balloon...) on the market today. It would not be simple to select the best one for your situation. However, You will have a feel for the most effective mortgage loan just by answering the next questions.
1. How long do you intend to live in your new house?
2. Do you think the present rates are at their lowest?
3. You expect to be earning additional cash in the years ahead?
4. How well do you tolerate risk?
Finding the best mortgage is all about saving money. You took your time to settle on your dream house, shouldn't you also carefully evaluate the financing for that home?
Additional Resources
Loan Amortization Table
Amortization Schedule
Adjustable Rate Mortgages (ARM)
With an ARM, the interest rate varies periodically, mostly in relation to an index (for instance, the rates that set by Federal Reserve), and monthly payments may go up or down accordingly. Changing periods regularly happen at intervals of one, three or five years. On an annual adjustment, you normally begin with a rate that is two to three percentage points below the price of fixed rate loan.
You should get an ARM if:
1. You expect to pay-off the loan of your new home at intervals four to five years.
2. You are projecting to stay in your home for less than a few years.
3. You want to decrease your payments in the first year.
4. You are believing that your income will rise.
5. And here is the foremost important factor, you'll be able to handle payments when the rates climb up.
Fixed-Rate Mortgages
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 climb, you will have a good laugh at them. How about if they drop? You may refinance at a lower rate.
Consider a fixed rate loan if:
1. You will stay in your house for more than ten years.
2. You are close to retirement which means that your earnings maybe lower.
3. You predict that rates are likely to travel up.
4. You would love the safety of having an unchanged monthly payment.
Hybrid Mortgages
As the name implied, a Hybrid Mortgage is a combination of Fixed and Adjustable rates. With these mortgages, you have a fixed rate for a specified number of years (normally 3,5,7 or 10), then the mortgage will convert over to adjustable rate.
Consider a Hybrid Mortgages if:
1. You will stay in your new home for only a few years. The benefit is you will have a fixed rate at a lower monthly payments than the real fixed-rate mortgage.
2. You think the current rates are too high, however you don't want to lose a chance to have your dream home.
3. You think that your salary will rise in the near future, therefore when your rate is changing to ARM doesn't bother you too much.
Besides Fixed, Adjustable and Hybrid, there also are many different types of mortgages (Two-Step , Balloon...) on the market today. It would not be simple to select the best one for your situation. However, You will have a feel for the most effective mortgage loan just by answering the next questions.
1. How long do you intend to live in your new house?
2. Do you think the present rates are at their lowest?
3. You expect to be earning additional cash in the years ahead?
4. How well do you tolerate risk?
Finding the best mortgage is all about saving money. You took your time to settle on your dream house, shouldn't you also carefully evaluate the financing for that home?
Additional Resources
Loan Amortization Table
Amortization Schedule
