If you have plans to own a dream house and you are looking to borrow money, then the whole process can be quite intimidating. Let me start by explaining a few mortgage options, and the multiple variations that go along with these options. First, in order to have an affordable mortgage, it is not necessary to be a loan pro. All you need is to take one step at a time, research, and learn from articles such as this one.
So, while you look for a home loan the first question that you should ask yourself is what type of mortgage will suit you. Is it a fixed-rate or adjustable rate mortgage. If you don’t know what these types of mortgages are, let me help you by explaining the similarities:
- You need to showcase your credit worthiness in both the types. This can be done by revealing the details regarding your income, debts, credit history, and assets.
- Both types give you the freedom of borrowing a considerable amount of money and let you repay it by making payments on a monthly basis.
- In both the options, the starting year’s payments go for repaying the interest on the debt. Following that, your equity in the home tends to grow at a swift pace.
So, let us divert our attention towards the common options when it comes to mortgage –
As a borrower, it is considered the safest and calculable option. This option is basically long-term loans and you can have 10-15 year fixed-rate mortgages. When you have finalized this option, the interest rate gets locked. It remains with you as long as you have the mortgage – until you refinance, sell, or pay it off. Let us say, if your mortgage is 5% then it will remain the same for 30 years. Fixed-rate mortgage can be a smart choice when –
- You have plans to stay in the home for more than 6 years.
- The interest rates are scaling high.
Adjustable Rate Mortgage
Also known as ARMs, here the interest rate, employed on the outstanding balance, tend to vary throughout the life of the loan. Generally, the interest rate, in the start, remains fixed for a specific period of time, and afterward it resets every year or even monthly. A permanent percent rate that gets added to the index value to find out the fully indexed interest rate of ARM (adjustable rate mortgage) is called ARM margin.
Adjustable rate mortgage, pretty much like a fixed-rate mortgage, also can be of any length of time, although 30-year mortgages are quite famous. All the rules, related to ARM, will be mentioned in your contract and ensure that you have gone through thoroughly before signing the mortgage papers.
Let me recite that choosing an adjustable-rate mortgage can be a good option when –
- You are thinking of selling or refinancing prior to the rates getting adjusted significantly.
- The interest rates are tumbling down (so your payments will remain identical or become smaller).
- There are strong probabilities that your income will grow and a bigger house payment won’t make any difference to your finances. By just hoping that you will make more money can prove risky.
This type of mortgage has the combination of both the fixed-rate and adjustable rate mortgages. In the starting, it acts pretty much like a fixed-ratio mortgage having a steady interest rate for a maximum of ten years. But then it gets converted to ARM, where the rate gets adjusted on a yearly basis for the rest of the loan period.
At the mortgage charts, the hybrids are mentioned as 3/1 or 5/1. One denotes the actual time period of the fixed term – it is usually for a maximum of ten years. The second is the arrangement interval that applies as and when the fixed tenure gets over. So with 7/1 hybrid, the fixed rate of interest that you need to pay is for seven years, and after that, the interest rate will change to annually.
Hybrid mortgage can be a good choice for you when –
- You sell your home or refinance prior before the fixed-rate period comes to an end.
This type of mortgage is only for a short term and it like a fixed-rate mortgage. The payments that you have to make on a monthly basis are on a lower side as you have to make a huge balloon payment when the loan tenure comes to an end. The key reason behind the payments being low is because its main interest gets paid on a monthly basis. It is a great choice for all those responsible borrowers out there who aim to sell off their home before the due date of the balloon payment.
As per this mortgage, it allows the addition of another mortgage and more money can be borrowed. Your second mortgage lender is in the second position; this means that they only get paid on one condition i.e. if there is some money left once the first mortgage holder has been paid. At times, the second mortgage is being used to make the payment for the home improvements and even for higher education.
So there you have it, if you want to know about the different types of the mortgage, then the above-discussed information will surely be of great help.
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