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Mortgage Loan Types
from: Maxx Home GuidesUnless you're able to pay cash, securing a home mortgage loan is going be necessary for most people who want purchase a house. However, it's important that you understand and choose the most appropriate for you, otherwise, you could end paying much more in interest over the term of the mortgage loan than necessary.
Loan providers will be able to give you assistance in understanding your loan options, which can be too complex and confusing for most people to grasp. Therefore it's in your best interest to communicate your needs to your loan agent and you'll surly receive professional advice and suggestions from them.
One type of mortgage you should understand is called a fixed rate mortgage, in other words, the interest rate is consistent throughout the term of the loan. This means that monthly payments don't fluctuate, remaining the same until everything has been settled.
To get lower monthly payments, you may now choose a 30-year fixed-rate mortgage. Of course, the downside is that it will take a while to accumulate some equity in your home. This is a good option for those who intend to stay in the home for quite a few years and want a stable rate.
If not, you may want to look at a 15-year fixed-rate mortgage instead. Since the principal and interest are distributed over a 15-year period, you will accumulate equity in your home much faster. However, the monthly payment will be substantially higher since you've cut the term in half. This option is a good choice if you plan on selling your home in a few years, would like to have a stable rate and can afford the higher monthly payments.
Of course, the main disadvantage of a fixed rate mortgage is manifested if interest rates happen to go down. Once you've agreed to a specific rate at the start, regardless of how much interest rates decrease, you'll still be paying at the higher rate you agreed on when you took out the fixed-rate mortgage.
Another type of mortgage is and adjustable rate mortgage. In this case, since interest rates regularly fluctuate up and down, your monthly payments will either increase or decrease along with the current rate. A 1-year adjustable rate mortgage, for example, will see adjustments made to the interest rate annually.
Common indices followed by adjustable rate mortgages include 1-year Treasury Notes, Federal Funds rate, and the National Cost of Funds Index. There's usually a margin of one to two percentage points which are added up to the declared index rates.
Rates may increase or decrease depending on the two caps normally included. The first cap sets forth limitations on the adjustment during a certain period while the second one gives limitations throughout the loan.
The advantage with this type is that monthly payments go down when there's a decrease in the index. However, payments will also be vulnerable to increasing when there's a rate increase. As you can see, you're going to have to evaluate your current situation by reviewing these pros and cons before deciding which one will serve your needs the best.
If you decide you don't want to be tied up to an adjustable rate mortgage until the end of the loan period, you may want opt to consider a convertible loan, which is actually an adjustable rate mortgage that can be changed to a fixed rate mortgage after a specific number of years. However, be aware that you may be required to pay for some additional costs if you do this.
Another way to possibly shorten your mortgage is to purchase a balloon mortgage which may function either as a fixed rate mortgage or an adjustable rate mortgage during the initial years. After a specific period of time, a considerable amount of loan is still owning which you have to pay in bulk. This is ideal for anyone planing of sell their home after a specific number of years to use the money generated from the sale to pay off the remaining balance.
There are, indeed, several choices for you to consider. You should first identify your exact financial situation and from there, choose the loan type that fits into your future plans. You can see why it's important to understand the current market conditions within the mortagage loan industry becasue you'll be able to best determine which loan type is the most advantageous given your financial capabilities.
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