When you decide that you’re going to buy a home, you have all sorts of decisions to make. For one, you need to choose the place you want to live, your neighborhood, and what kind of home you want to buy. Besides that, you also need to know how to choose a mortgage type. There are many different mortgage types to choose from, and you need to understand them if you’ll make the right choice.
How to Choose a Mortgage Type
The key to choosing the right mortgage type is understanding the different mortgages available, as well as their pros and cons. There are three basic types of mortgage that anyone can choose from, and it’s worth knowing which is right for you.
Fixed-Rate Mortgage
The fixed-rate mortgage is the most popular, conventional option that anyone can choose. It involves paying your down payment and then proceeding with monthly payments on your debt and interest. With regard to the name, the “fixed rate” refers to the rate the bank charges you on the interest of your loan. You lock in a certain rate for a number of years, gaining stability and predictability in your payments. However, you might end up paying more in the long run.
If you need predictable payments or anticipate rising interest rates, a fixed-rate mortgage can be a great choice. Most homeowners opt for this type of loan, since the others generally entail more risk or vulnerability for the loan-taker.
Variable Rate Mortgage
A variable rate mortgage is a counterpart to fixed-rate mortgages. The rate that you pay on interest isn’t pinned to one specific rate, and it can go up or down as the interest rates do. Since there’s a bit of risk involved with variable-rate mortgages, it’s sometimes possible to get more favorable terms by choosing them. Additionally, you’ll benefit from favorable interest rates in the form of lower payments.
There aren’t as many cases where a variable rate mortgage is a better choice than a fixed-rate mortgage, but it’s usually a similarly sound option. While you shouldn’t choose a variable rate mortgage if your budget has a narrow margin for error, it’s a fine choice if you’re more comfortable.
Interest-Only Mortgage
If you take out an interest-only mortgage, then you’ll go five or ten years without paying down your debt. Instead, you’ll only pay your interest during these years, which boils down to extremely low home payments. However, the term of your mortgage will be much longer and you’ll spend far more on interest overall. With interest-only mortgages, you enjoy great short-term gains and greater long-term losses.
In theory, interest-only mortgages are deeply inefficient, and for the average person, they likely are. However, an interest-only mortgage carries one powerful advantage; financial dynamism. You can spend these years of low home payments investing aggressively, making lump-sum payments you otherwise couldn’t, or investing the money. In this case, the profit you generate from your short-term gains could outweigh your long-term losses.
Find the Right Mortgage Type
Potempa Team represents some of the finest real estate and mortgage experts in Arizona. If you’re still not clear on the right type of mortgage for your purposes, then schedule a consultation with us to find out.
