Oh, you just have to get that house. It has everything you want, from the walk-in closets to the master bathroom tub with the water jets. It’s time to make that leap into homeownership.
Unless you’re Mark Zuckerberg, you won’t be pulling a wad of cash out of your wallet to purchase a home outright. A mortgage loan is the most viable option for the first-time homebuyer to eventually own the house of their dreams through manageable payments. First, though, you have to get past the nightmares of choosing the best mortgage loan.
While sitting in the chair across from your lender, you’ll be bombarded with words like “adjustable rate mortgage,” “fixed-rate loan,” “principal” and “interest.” Trying to sift through the jargon can send your mind spinning as you try to determine what type of mortgage loan to get.
Let the Dream Team help demystify the facts about a fixed-rate mortgage and an adjustable-rate mortgage. Then we will give you some scenarios to help clarify which mortgage is right for certain needs.
The most popular mortgage out there, a fixed-rate mortgage is a loan where the interest rate and mortgage payments do not change for the length of the loan term, although the principal may change as the loan matures. What makes these loans so appealing is that you can obtain one with a very long repayment period — 15, 20 or 30 years — while making low payments that won’t change.
The downside? Interest rates will be high whenever you choose a loan that has an extended term. Also, your monthly payments will be applied directly to the interest first before the principal gets paid down, which can become costly over the years.
An adjustable-rate mortgage (ARM) is a loan where the interest is not set in stone, like a fixed-rate mortgage, for the entire duration of the loan. Instead, the interest will rise and fall based on the current market conditions, which means your monthly payments can vary from month to month. For the first few years, the interest rate will be fixed before it changes to an adjustable rate. Monthly payments will usually be higher because many people will choose a shorter loan period.
The advantage of this kind of mortgage is that the initial interest rate will be lower than the interest on a fixed-rate mortgage. Also, there will be a cap to how high an interest rate will rise.
Which To Pick?
Check out the following scenarios to see if one applies to your financial status. This can help you decide which type of mortgage to choose. Base your choices on how much you can afford in monthly payments, how long you plan to be in the house, what types of interest rates appeal to you, and whether you don’t mind taking a risk concerning the fluctuating market.
You plan to live in the home forever. You like to know exactly what you are paying for each month to help balance your budget.
A fixed-rate loan would be ideal since you are making a lifelong commitment to stay in the home. You’ll know every month what your mortgage payments will be and won’t be taken off-guard by fluctuating interest rates.
You’ve always dreamed about becoming a real estate investor. You don’t plan to live in the home longer than five years — instead, you’ll sell it off at a profit and find a better place.
An adjustable-rate mortgage will work for you, since you will have a fixed interest rate for a certain number of years. By the time the adjustable rate kicks in, you’ll be ready to sell the home and won’t have to worry about a higher rate.
You’ve been following the mortgage market and have seen how great interest rates are at the moment. Yet you are afraid to get locked into an interest rate now only to find it dropping in a few years, as you will have to continue to pay the high amount.
The great thing about mortgages is that you aren’t locked into the loan. You can obtain a fixed-rate loan now. When interest rates lower, you can refinance it for an adjustable-rate mortgage to take advantage of the lower rate. To come out ahead in the deal, make sure your house has appreciated in value and that you aren’t paying exorbitant fees to refinance your existing mortgage.
The mortgage world doesn’t have to be a confusing place so long as you understand what terms are included in the loan. Read through all the documents and ask questions so you get the best mortgage for your budget and your future plans.