Chances are, if you are thinking about buying a home, you need a mortgage. It is a costly purchase that few can afford outright. There are two basic types of mortgage products on the market—the fixed rate mortgage and the adjustable rate mortgage. The former is the more popular option for a variety of reasons. If you are thinking about leaning this way, here are some important things to know about this type of loan.
Advantages
Your mortgage is a major expense—not only will it likely be your biggest monthly bill, it is the one that will be sticking around the longest; up to three decades for most of us. Fixed rate mortgages offer a set interest rate for the life of the loan, which means that you will have the same payment amount month in and month out. This makes budgeting easier; it can put people at ease. These products are not complicated to understand and do not vary much from lender to lender.
Disadvantages
These loans tend to come with higher interest rates, so qualifying for one may be more difficult; you may also find that you cannot afford mortgage payments based on the current interest rates of fixed loans. The only way to take advantage of rate declines is to refinance your home, which can be costly, and may not always result in the types of savings you anticipate. Also, studies have found that people who opt for fixed-rate mortgages pay more over time in interest than those who opt for adjustable-rate loans. But, the stability and predictability are hard to pass up for most people.
Different Types of Fixed-Rate Loans
Depending on the exact term of your mortgage, there may be certain stipulations regarding pre-payment, refinancing, extra payments,etc…For example, you may have to pay a penalty for refinancing before a certain time, such as X-months worth of interest.
Some loans allow you to make interest-only payments for a set period of time, before the principal gets rolled in. This can be an attractive option for people who currently hold lower-paying entry level jobs and have less money to put towards a mortgage payment. You can buy a home that is more expensive than you might have considered; the idea is that as time passes, your financial situation will have improved and you will be able to absorb the higher payment when it comes. But, be careful with this route; it is all too easy to get seduced by those early low-payments on a house that you really cannot afford.
Is It Right for Me?
You can find many an in-depth article on this topic, but ultimately it comes down to what you feel is best for you. Adjustable rate mortgages can be unpredictable, but you may save more money over the life of your loan. It can be hard to think of that big picture though, since most of us are thinking in terms of monthly payments and what we can afford to put towards a home every month. If you respond well to predictability and it is important to know exactly how much money you will be paying every month, this may be the way to go.
Kelli Cooper is a freelance writer who blogs about a variety of personal finance topics.
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