One of the most confusing things to decide on for a person who is buying a house for sale is the right kind of mortgage to pick. If you want to ensure that your mortgage will be easy to deal with as years pass, you need to choose carefully. In order to simplify things, we will focus on the two basic mortgage options: the adjustable rate mortgage and the fixed rate mortgage.
1. Fixed-rate mortgage
Of the two types, the fixed-rate mortgage is seen to be more conventional. If you are buying a house that you want to keep for a long time, youâ€™d do well to get a fixed-rate mortgage, because your interest rate will remain the safe during the course of your loan term. In the beginning of your payments, the money that you give each month will be taken as payment for the loanâ€™s interest. When you are nearing the end of the loanâ€™s term, the payments that you give will then be for paying the principal.
If you want to be reassured that your interest rates will never change during your entire term even if the interest rates of the lender do, you should choose a fixed-rate mortgage. Because you already know how much you are supposed to pay in your mortgage, itâ€™s easier to make a monthly budget for all of your other household expenses.
Fixed-rate mortgages have a number of disadvantages too, and one is that they often come with higher interest rates. Furthermore, if interest rates were to go down all of a sudden, you wonâ€™t be able to enjoy them, since your mortgage option ties you to a fixed rate. Refinancing is not out of the question, but be prepared to face additional charges.
2. Adjustable-rate mortgage
Due to the fact that it relies on the rise and fall of the market, an adjustable-rate mortgage or ARM has adjustment periods that change occasionally. A rate cap is set in place for every ARM to make sure that your interest rate will never fall out of the determined percentage during the term of your payment. An adjustable-rate mortgage is ideal for those who arenâ€™t planning on keeping a property, because this gives them the option to sell before rates grow.
One of the benefits of choosing an ARM is that during the first years of payment, your rates are not as high as those of other mortgages, depending on your loanâ€™s terms. As stated earlier, the market dictates how high or how low your interest rates will be if you have an ARM, so you can take advantage of lower rates when they do happen.
However, because your rates are adjustable, as the introductory period of your loan gets to the end, your payments will increase. Moreover, without a secure rate to base your mortgage payment on, it will be more difficult for you to make a monthly financial plan.
Study your budget so that you have a clear picture of the range of house prices you should be looking at, which also tells you the best type of mortgage for you. Be sure to also choose your lender carefully; they should have a great client history and great rates.