The most important part of the home buying process is choosing the right mortgage loan for your new home. Because homes are so expensive, most people cannot afford to pay for a new home outright with savings, so learning about the different types of mortgage loans available is paramount to being able to purchase a home. The different mortgage options available have the ability to cost or save the potential homeowner a great deal of money over the life of the loan. Here are some things that you should think about when attempting to choose the right mortgage loan for your new home.
Fixed Rate Mortgage Loans
Fixed rate mortgage loans are home loans that have an interest rate that does not change over the life of the loan. Many homeowners prefer these types of mortgage loans because the amount that they are required to pay each month remains the same until the loan is paid off, allowing them to accurately budget for the payment. As the loan is paid off, more of the payment goes towards the principal of the loan and less goes towards the interest owed to the bank.
These mortgages are typically written for a term of 15 or 30 years. With a 30 year mortgage term, the payments are smaller but you will pay more in interest over the life of the loan. With a 15 year mortgage term, you will pay less interest and build equity in your home faster, but the payments are higher, taking more of your after-tax income each month. Before deciding which type of mortgage loan to obtain, all of these factors should be taken into consideration and evaluated against your current financial situation.
Adjustable Rate Mortgage Loans
Adjustable rate mortgage loans are home loans with an interest rate that fluctuates with the market rate. When the market rates are low, the homeowner has a lower mortgage payment, but when the market rate rises, the amount required to keep the loan current rises as well. There is no guarantee of what the market rate will be in the future, so homeowners that choose this type of mortgage rate are taking a gamble that the rate will remain the same or go lower in the future.
Because of the changing interest rate, it can be difficult to budget for your mortgage payments if you choose this type of loan. Most of the rates that mortgage loans are tied to change quarterly, semi-annually, or annually. If the rate begins to rise, you could find yourself paying more and more for your home each month until the payments become unsustainable. Depending on market conditions, an adjustable rate mortgage could end up being more expensive than a fixed rate mortgage over the same term.
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If you have the cash flow to support it, I always advocate a 15-year mortgage over a 30-year. Many will say that they like the flexibility of a 30-year and point out that they can just pay the difference all while keeping the flexibility. This is all true but I think the option of spending the money or using it for other purposes often tempts people and the best intentions don’t hold true.
We took out a 30 year, but scheduled our payments as if it was a 20 year mortgage. That was 7 years ago and we thought we might give ourselves a breakand make the lower payments while the girls are in college. That hasn’t happened. We are so used to making the higher payment that we’ve budgeted and planned around it and don’t think twice about it. Funny how that works, eh?