Some first time home buyers are not aware that they have a plethora of options when it comes to a mortgage. And many do not know the terms associated with financing a home. This lack of knowledge can hurt homebuyers that end up with payment they cannot afford with high interest rates. Before considering what type of mortgage you need, ask yourself these questions:
• Do I want to stay in this home for the rest of my life or for just a few years?
• Do I want stable monthly payments or do I want the ability to take advantage of low interest rates?
• How long do I want the life of the loan to be?
You answers to those questions will determine what type of mortgage is best for you. Here are a few types:
Fixed Rate Mortgage
How it works: Your loan stays at the same interest rate for the entire life of the loan. This type of loan can be applied to mortgages with 10 to 30 year terms.
Why get it? Budgeting is easy when you now how much your house payment will be every month. This type for mortgage is also good for people who plan to live in their homes for a long time.
Balloon Mortgage
How it works: The homeowner agrees to pay the loan in full at the end of the loan. The loan can be for three, five or seven years. The interest rate is stable during the loan. The downside is the homeowner will have a large payment when the loan ends.
Why get it? Homeowners who are only going to say in their homes for a few years like this loan as do people who want to pay off the loan quickly. The stable monthly payments are attractive to some homeowners.
Adjustable Rate Mortgages
Many people think that adjustable rate mortgages, also known as ARMS, are “one size fits all.” There are many types of ARMS available.
10/1 Year Adjustable Rate Mortgage (ARM)
How it works: This may be the most popular type of ARM. The interest rate stays the same for ten years. Beginning in the 11th year, the rate fluctuates based on the lender’s index.
Why get it? Young families on a budget appreciate the fact that they will know what their house payment will be for 10 years. Once the rate starts adjusting, they may be in a position to sell the house or if they are lucky the rate will be much lower than what they have been paying.
One Year Adjustable Rate Mortgage
How it works: The interest rate on the loan adjusts every year based on the market. Homeowners with this type of loan will see their payments increase or decrease every year.
Why get it: The one year ARM is great when interest rates are low. However many homeowners find themselves trying to renegotiate their loan once rates increase. But they are not always successful.
When working with your mortgage company, many sure you discuss the pros and cons of each type of mortgage. You don’t want to get stuck with a payment you cannot afford.
Author Resource:
Chriss Carr is the Vice-President of CFS-Mortgage. Founded in 1982, Phoenix-based CFS Mortgage Corporation is a closely-held mortgage banking firm licensed by the state of Arizona. http://www.cfs-mortgage.com
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