A
Fixed Rate Mortgage
is one in which the rate remains the same across the life of
the loan. The advantage is that monthly payments will remain
the same. However, if you lock into a higher interest rate,
the rate will not change, even if interest rates go down in
the future. In my opinion, this is the best type of loan to
get. A fixed rate mortgage offers more stability by
keeping your payment the same for the duration of the
loan.
The lowest monthly payments come
from 30-year fixed-rate mortgages.
However, these mortgages also take longest to build up
equity in your home. Experts recommend a 30-year mortgage if
you are planning to stay in your home for several years and
want a stable rate.
Also common are
15-year fixed-rate mortgages.
These loans spread the principal and interest across a
15-year period, after which you have paid off your loan.
Because of the shorter term of the loan, you can build up
equity in your Utah County home at a much faster pace.
However, monthly payments are higher than for a 30-year
fixed-rate mortgage. Experts recommend a 15-year fixed-rate
mortgage if you are planning to sell your home in a few
years and want a stable rate. If you can afford a 15-year
mortgage you should do it. You will own your home in half
the time as a 30 year mortgage and often on pay a small
increase in your payment. A 15 year mortgage offers a lower
interest rate.
Adjustable-Rate Mortgages,
or ARMs as they are commonly called, are ones in which the
interest rate changes periodically according to a fixed
index. A 1-year ARM adjusts the interest rate annually.
Monthly payments will increase or decrease along with the
index rate, which is specified by the mortgage. Common
indices include 1-year Treasury notes, Federal funds rate
and the national cost of funds index. A margin -- usually
one or two percentage points -- is added to the index rate.
Adjustable-rate mortgages include
two caps on the amount the rate can increase or decrease.
One cap limits the interest rate adjustment in any one
adjustment period (e.g. one year in a one-year ARM), and the
second cap limits the interest rate adjustment across the
lifetime of the loan.
The advantage of an adjustable-rate mortgage is that
monthly payments can decrease when the index goes down.
However, monthly payments will increase when the index goes
up. I am not familiar with anyone offering adjustable rate
mortgages since the housing meltdown. I don't recommend this
type of loan even if it becomes available in the future.
One way of shortening the length of your mortgage is to
purchase a balloon mortgage.
It works like an ARM or a fixed-rate mortgage for the first
several years. After that period of time has expired, you
owe a large payment -- sometimes the remaining balance on
the loan. The advantage of this type of loan is that it
keeps monthly payments low. Experts recommend this type of
loan for people who are planning to sell their homes within
a few years, and can pay off the balloon payment from the
proceeds of the sale of the house.
Convertible loan
is an ARM that can be converted to a fixed-rate mortgage
after a specified number of years.
There may be a cost associated with a convertible loan.
Team
Teasdale Realty will help you find an affordable loan
and help guide you to a good lender for your next home.