There
are so many different types of loans out there. This is because lenders
want your business. It is a good thing because there is definitely a loan
that is perfect for
you. But it also makes mortgage
shopping a bit confusing.
Mortgages come in two categories:
fixed rate and adjustable. The rate is the amount of interest you pay the
bank in return for borrowing its money.
Fixed-rate mortgages have an
interest rate that doesn't change over time - it is fixed. A lot of home
buyers feel more comfortable with a fixed rate, because they know that the
monthly payment will never change. This gives a level of security in that
the monthly cash flow remains predictable. The downside is that you will
often pay a higher interest rate for a fixed-rate mortgage. This protects
the bank from losing money on your loan if interest rates go up and your
mortgage rate remains low.
The standard fixed mortgage is for
30 years, but if you can handle a higher payment, you can choose a 15-year
fixed mortgage. This will help you to build equity in your home faster.
You will also receive a lower rate and pay much less in interest over the
life of the loan. The payments will be higher as you are paying for a
shorter amount of time.
If you plan on living in your home
for a long time, a fixed rate makes perfect sense for you. You may pay
slightly more in interest, but if you buy when rates are low it will be
worth it.
Adjustable-rate mortgages have an
interest rate that fluctuates based on the open market. Lenders pay a
lower rate for adjustable mortgages because you are accepting some of the
risk that interest rates will change. The lower interest rate makes your
monthly payments lower in the beginning. These mortgages give many buyers
a chance to buy a home that is more expensive. If rates drop, you will be
doing great - but never count on it. If rates rise, your payments can go
much higher than that of a 30-year fixed.
You have to find an adjustable that
fits your needs. The lowest rate is on a one-year adjustable. Those with a
monthly rate are cheaper, but too risky. A one-year has a rate that
changes annually. This is fairly risky as well. You may receive a really
low "teaser" rate for the first year, only to have it jump up the next
year.
There are limits placed on how much an adjustable can
change. Lenders will often limit the amount the rate can change to
two points a year, with a lifetime cap at six points.
A slightly more expensive option is
a delayed adjustable. This is often written as a "3-1" or "5-1"
adjustable. This means that the loan is fixed for three or five years and
then will be adjusted annually. There are also 7-1s and 10-1s. The longer
the fixed period, the higher the interest rate will be. If you can match
the fixed period to the time you plan on staying in the house, you can
come out ahead.
What type of mortgage you decide to
go with depends on your circumstances and how much risk you are willing to
accept.
