Buying a new house is thrilling, but the financing side of things can be overwhelming, too. Perhaps you’re at sea in choosing the best mortgage option for you. Worry not! Picking among the various types of mortgage loans is not that hard if you know the trend. Once you have done some homework, which usually includes nailing down a budget and down payment amount, and reviewing your credit, you will have a better idea of what loan suits you best.
Below are the two basic types of mortgages you can choose from:
A fixed-rate mortgage is a loan where the interest rate remains the same throughout the loan. The interest is what the bank or money lender charges for lending you the money. The monthly payment will also go toward paying off your loan principal (the amount you borrowed). This is recommended if you want to pay a consistent amount and help you with your monthly budget.
The most common fixed-rate loans are the 10-year, 15-year, 20-year, and 30-year loans. Let us discover their main differences and similarities.
●30-year fixed mortgage. This home loan maintains the same interest rate and monthly principal-and-interest payment over the 30-year loan period. A 30-year fixed mortgage rate is the top choice for many homebuyers because of its stable monthly principal and interest payments ideal for predictable monthly household budgets, at a more affordable cost than shorter-term loans.
●20-year fixed mortgage. Some of the reasons why a 20-year fixed mortgage is better than other mortgage options are its stability and lower interest rate. Also, you will have less time before you own your home and a lower total cost of borrowing.
●15-year fixed mortgage. This type comes with lower rates than just about any other mortgage loan type. It is because a 15-year loan is less risky for the lenders. As we all know, the longer the term, the higher the risk that the loan will not be repaid.
●10-year fixed mortgage. If you’re thinking of buying a house that you intend to stay in for at least ten years, and you also believe that interest rates will rise sharply in the future, then this mortgage is perfect for you. The 10-year fixed mortgage will allow you to pay off the mortgage faster and typically has a low-interest rate.
In an adjustable-rate mortgage, the interest rate applied on the unpaid balance differs all through the life of the loan. The mortgage rate is adjustable, making the initial interest rate fixed for a certain period. However, after the starting period, the interest rate will reset regularly, sometimes monthly or yearly. ARMs are also called floating mortgages or variable-rate mortgages. The interest rate for ARMs is reset based on an index or benchmark, plus an additional spread called an ARM margin.
An adjustable-rate mortgage can be a wise choice for you if you plan to settle the loan within a specific amount of time.
Choosing the loan that is best for your situation relies primarily on your financial status. It would help if you considered first your income, employment, credit history and score, and financial goals.
Yes, buying a house is an important milestone for anyone, but it can be intimidating when you are unsure of what to expect. We hope this article would be of great help when you decide to buy a new house, especially if you plan to go on a 30-year fixed mortgage. If there are things that might confuse you, feel free to consult your trusted financial advisor to help you decide which option is best for you.