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Financing your home purchase is very important for you to understand. There are many alternatives, and the loan that is right for you might not be the same loan that is right for someone else. Become an educated borrower. You do not want surprises in your loan.
Fixed Rate Mortgage - Payments remain the same for the the life of the loan.
Types of fixed rate mortgages include: various terms (such as 15 year loans, 20 year loans, 30 year loans, and some 40-year loans).
The major advantage of a fixed rate mortgage is that it gives you a steady, predictable payment amount. You will always know your monthly payment, and it remains constant throughout the term of the loan Therefore, your housing cost remains unaffected by interest rate changes and inflation.
Adjustable Rate Mortgage (ARM): Payments increase or decrease on a regular schedule with changes in interest rates. Increases or decreases are subject to limits, also known as "caps".
Types of adjustable rate mortgages include
Balloon Mortgage - Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
Two-Step Mortgage - Interest rate is fixed for a certain period of time, then it adjusts and "acts" like an ARM for the remainder of the life of the loan. ARM linked to a specific index or margin
Advantages of adjustable rate mortgages:
- Generally an adjustable rate mortgage offers lower initial interest rates
- Generally monthly payments can start lower
- May allow a borrower to qualify for a larger loan amount
When should you consider an ARM?
When you get an adjustable rate mortgage, you are assuming risk because the interest rate can go up, and your payment can go up - significantly. YOu should be confident that your income will grow steadily, and that you can manage the payment increase(s).
What are the advantages of the 15 year loan?
On a 15 year loan, the interest rate is usually lower than on a 30 year loan. You will build equity faster because early payments pay more principal.
Can I pay off my loan before the end of the loan term?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
Loans are a very personal part of your home buying. You should learn about financing, and consult with professionals to make sure you understand the loan you are getting, and how it applies to your personal situation.
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