Keeping up to date on the types of mortgages available, and the state
of the mortgage market is crucial when purchasing property. Some
mortgages may be appropriate for others in similar situations, while
others could be the wrong choice entirely. Finding the correct
mortgage for your specific situation could save you thousands of
dollars.
Speaking with your local lending institution and/or broker should be
your first step in acquiring a good mortgage. These people are familiar
with the ever-changing real estate market, the details of which take
years to understand. What follows is merely an over-view of the main
types of mortgages available to you and the situations in which each
might be appropriate.
The first type of mortgage is called a Fixed Rate Mortgage, or
FRM. Fixed Rate means that the interest rate on the loan will
remain the same throughout the term of the loan. For example, if
your interest rate is 5% and your loan term is thirty years, then your
interest will still be 5% thirty years from now. These interest
rates are un-affected by the market. Monthly payments on fixed
rate mortgages go towards both the interest and the principal. At
the end of the term of your fixed rate mortgage, you will be paid off
free and clear.
The disadvantage to a fixed rate mortgage is that interest rates are
usually high. Because the lender stands to risk if interest rates
go up in the next twenty to thirty years, they safeguard themselves
with a high fixed interest rate. A fixed rate mortgage might be
the right choice for you if you plan on staying in your property for
the next thirty years. Shop around for a good interest
rate. As interest rates are low right now, a fixed rate mortgage
might be the right choice for those purchasing family
homes.
The next type of mortgage that you are likely to come across is called
an Adjustable Rate Mortgage, or ARM. With an adjustable rate
mortgage, interest rates and monthly payments will be fixed for a set
period of time, usually a few months to a few years. After this
initial period, the interest rate on your mortgage will change based on
market fluctuations.
Initial interest rates on adjustable rate mortgages are usually very
low. The trade off is that the borrower risks paying high rates
in the future if the market fluctuates to their disadvantage.
Different lenders have different formulas for re-calculating
interest. Some have maximum interest caps that you need not worry
about paying above. For example, if your cap is 10%, you never have to
worry about paying more than 10% even if market rates soar to
16%.
Some lenders may adjust their interest rates every three months, while
some may do so only every year. Another thing to beware of with
an ARM is that during the initial years in which interest is fixed,
often, payments are not being made towards the principal. At the
end of your introductory period you owe the same amount you did before,
or more.
Adjustable Rate Mortgages may be perfect for someone who plans to turn
over or “flip” their property within a few years. So it is that
you pay very little on your mortgage until the time that you sell your
property, freeing up your funds to use on improvements and allowing you
to profit. It is also good for investment properties such as
business places, which may need a few years to begin making a profit.
The last most common type of mortgage is called a Balloon
Mortgage. This type of mortgage has a fixed interest rate and
monthly payment. After a certain fixed amount of time, usually
five or ten years, the entire balance of the loan is due all at once.
Because people generally do not have the cash to pay the balloon
payment, a new mortgage can be arranged. If no new mortgage can
be arranged, the homeowner loses the house. People who cannot
qualify for fixed or adjustable rate mortgages generally take out these
loans. The hope is that, after five or ten years, they will be
able to qualify for another, better mortgage.
Of course, if you already own a home, you may be familiar with all of
this. You also may be able to take out a home equity loan to pay
for your next property. If you are interested in building a home,
a construction loan may be the most appropriate. There are dozens
of types of mortgages in addition to the three just described.
Your own research into the subject is invaluable.
Once again, speak to your broker or local lender about your
options. They are the most familiar with your particular
financial situation and with the mortgage market itself. Most
importantly, do not get stuck with a mortgage that’s wrong for you,
because the right one is out there.
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