A mortgage is a loan that allows you to buy a home if you do not have the finances to pay it all on your own. This agreement gives your lender the right to retract this mortgage if you do not make monthly payments. Therefore, you want to make sure you pick the mortgage that accords with your needs.
Fixed Rate Mortgages, as the name suggests, have fixed interest rates. The interest rate does not change; therefore, your monthly mortgage payments stay the same. This option is ideal for those who have an unsteady income, are looking to save up, or simply do not have the money to take the riskier types of mortgages.
Adjustable Rate Mortgages, also known as ARMs, have interest rates that change over time. This causes your monthly mortgage to change. Although risky, the appeal of these mortgages come from the lower interest rates at the beginning, compared to fixed-rate mortgages. Depending on the loan, you might save more in the end.
For more pros and cons of fixed-rate mortgages and ARMs, look here.
Hybrid Mortgages have qualities of both fixed-rate mortgages and ARMs. They may start at a fixed interest rate and begin to change over time.
Finding the Right Mortgage for You
The right mortgage depends on your personal assessment of your ability to make the payments. When you assess, you should:
Think about your financial situation.
What does your income look like? What is your monthly budget like? How much are you saving? Are these in line with the risks of certain mortgages, or would you have to borrow money to make the payments? Are your needs relatively predictable, or will they change over time? Are you planning to start a family? Will you be able to make these payments then?
Our article on Tips for First-Time Home Buyers will help you come up with the right questions in this self assessment here.
Think about the future.
For how long do you see yourself keeping the mortgage? If you plan to stay for a long period, like a decade, you may want the predictability of a fixed-rate mortgage. But if you only plan to stay a handful of years, the lower interest rates of the first few years of a hybrid or ARM may benefit you.
The type of mortgage you should invest in should be in line with your financial standing and future plans. This requires some self-reflection as well as research on the mortgage rates of lenders near you.
Be sure to avoid negative amortization. This means that instead of reducing the loan balance over time, some mortgages increase your loan balance and debt over time. This makes paying off your loans a never-ending and expensive task.
Find out more about negative amortization here.
Overall, transparency is key. If you have hard numbers in front of you to compare the rates, you will be able to decide which lender and type of mortgage will benefit you in the short-term and long-term.
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