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How to Pick a Loan Type for Your Home MortgageThere are many different home purchase mortgage types. If you are planning to take out a loan to buy a home, you'll need to select a mortgage type early in the process. These mortgage types, often called loan products by lenders and industry professionals, each provide different benefits and advantages to borrowers. Whether you select one loan type or another will ultimately depend on your exact needs as a borrower and a home buyer. Due to the importance of this decision, much has been written and said about the advantages and disadvantages of various loan type. If you're a first time home buyer, you may have found the sheer volume of this information overwhelming or the variety of opinions confusing. Read through the following list of different mortgage products to get a better idea of what loan products are available to you and how they can benefit you. Fixed Rate MortgageThe fixed rate mortgage is the staple loan product of the lending industry. It is one of the most common mortgage types and is one of the simplest in its structure. It is also one of the most beneficial loan products available on the market both for borrowers and for lenders. The most significant aspect of this mortgage is the characteristic that is spelled out in its name. The interest rate on the loan is fixed or constant for the entire length of the loan term. This means that the interest rate you borrow at won't ever go up or down. You can accurately project your exact monthly payment amounts outward until the very last penny is paid. The fixed rate mortgage may be borrowed on either 30 year of 15 year terms. The 30 year fixed rate mortgage is commonly used as a home purchase mortgage, while the 15 year mortgage is more commonly used as a refinance mortgage. Adjustable Rate MortgageOnce equally as common as its more stable cousin, the adjustable rate mortgage has become somewhat more difficult to find in the years since the housing crisis hit hard. Many lenders, though, still offer this loan type to their customers. It can be a highly useful loan product for buyers in certain situations and comparatively disadvantageous for buyers in other situations. The complexity of the adjustable rate mortgage is predicated on the fact that the interest rate on the loan is not fixed but can shift and change, or adjust, over the length of the loan term. The direction that the mortgage rate trends and the levels to which it rises or falls are entirely dependent on the financial market. Most adjustable rate mortgages start out with fixed interest rates that remain constant for several years. After this initial period is over, these rates will adjust upward or downward depending on where average market lending rates are at the time. As you may expect, this adjustment can cause monthly payments to increase or decrease dramatically in a short time. This inherent volatility is both the strength and the weakness of the adjustable rate mortgage. If you're able to secure a low introductory rate on your adjustable rate mortgage, you can benefit by enjoying low monthly payments for several years. Introductory adjustable rate mortgage rates are typically much lower than introductory fixed rate mortgage rates. This can give some borrowers a financial benefit. If you're then able to refinance into a fixed rate mortgage before the adjustable rates move upward, you can save a lot of money. If, however, you end up stuck in a volatile mortgage with monthly payment amounts that seem to change overnight and are constantly increasing, you may find yourself in over your head in no time. Be very cautious when pursuing an adjustable rate mortgage. |
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