Sep
14

The Homebuyers Guide: Part Six: Types of Mortgages

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Now that you have decided to buy a home, it is time to look for financing, it is time to obtain a mortgage. 

A mortgage is a loan secured by a property/house and paid in installments over a set period of time. The mortgage secures your promise that the money borrowed will be repaid.For most of us, a mortgage is the largest and most serious financial obligation we ever make.

Freddie Mac states; there are many different types of mortgages, each with its own advantages and disadvantages, it is very important that you do your research.Remember that many people were impacted by predatory lenders and given mortgages that they could not sustain during the housing crisis of the last two years. Understanding these differences will enable you to choose the right mortgage for your financial situation and housing goals. Be an educated consumer!

For any other information on mortgages, log on to the Freddie Mac website.

Types of Mortgages

The two types of mortgages most commonly offered are fixed-rate and adjustable-rate mortgages.

1. Fixed-Rate Mortgages- Interest rates rise and fall over time. Back in the ’80’s the interest rate hovered around 19%, whereas a couple of years ago the interest rate was around 5%. A fixed rate mortgage locks you in to a permanant rate, there are no fluctuations. The mortgage term can be 15,20,30, or 40 years but the most common are the 15 and 30 year fixed mortgage.

  • Advantages: Stability: The interest rate never changes, even if the economy tanks. Your monthly payments will never change. If you are paying $1000 a month today, you will pay $1000 five years from now.
  • Disadvantages: Higher initial costs: The interest rates are usually higher than the initial rates of an adjustable mortgage.

2. Adjustable Rate Mortgages-The interest rates can change at certain points throughout the term of the loan. Most ARMs offer a fixed rate for a certain period of time (3,5,7,or 10 years). After that, the rate adjusts to match the interest rates that the financial markets are offering at the time.

  • Advantages: Lower initial costs: During the initial fixed term of an ARM, interest rates are usually lower than a fixed mortgage rates. Your payments are lower initially.
  • Disadvantages: Risk: ARMs expose you to risk. Initially, the rates are lower but after the initial phase is over and the rates rise, you’ll pay more.

Different ARMs adjust their interest rates in different ways. Always seek the advice of your financial adviser and your mortgage professional for any questions on mortgage.

3. Interest Only Mortgages

Certain ARMs allow you to pay interest only. With most ARMs, you pay the principal (the actual price) plus interest on the loan for a fixed period of time. This mortgage is different. Since you don’t have to pay down the principal, monthly payments are much lower than the standard fixed rate mortgages. However, when the interest only period expires (usually 5-7 years), you must either:

  • Pay off the entire balance in a lump sum                                                                                             
  • Start paying off the principal within each monthly payment.

This is the most crucial part of your homebuying process and should only be handled by a mortgage professional. Please seek the advice of financial professionals during your mortgage selection process.

For any other real estate questions, contact us at Info@MetroRealtyphx.com or 602.687.9933.

Comments

  1. Rodrigo Hege says:

    This is a good blog. Keep up all the work. I too love to blog. This is great everyone sharing opinions

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