Buying a new home is a large (and exciting) expense, which can often usher in the feeling of real adulthood. It’s a significant investment and one that may have a big impact on your lifestyle, depending on location and size. However, if you’re looking to buy a new home, you may want to consider the mortgage type you’ll use to finance your new place. A certain mortgage type may be more beneficial to your financial needs and some of the elements, such as interest, how much you pay and when you pay, can change, depending on both the lender and the borrower. It’s in your best interest to do your homework and see which option may be the best for you when buying your home.
What Is A Mortgage?
Getting down to basics, the language can often be the most confusing part of the transaction. It all sounds like a lot of financial mumbo jumbo, but as the borrower, it’s important that you understand the terms, so you can competently agree or disagree.
At its most basic, a mortgage is a type of loan. In a home mortgage, the homeowner borrows money from the bank, with the stipulation that if the money is not paid back, the bank can claim the house. If your mortgage ends in a foreclosure, the bank often has the right to evict you and your family and put the house up on the market to gain back the money not repaid.
What Are The Different Types of Mortgages?
The two most common mortgage types are a fixed-rate mortgage and an adjustable rate mortgage. There are two others that exist–interest only mortgages and payment options ARMs, but those aren’t used as commonly. The fixed-rate mortgage type means that the borrower has the same interest rate for the entire repayment span, regardless of changes in market. Over three-quarters of home loans are fixed-rate loans, which can come in repayment spans of 30, 15, or 10 years. Generally, the 30-year repayment plan is the one chosen by homeowners, as the monthly payment is more affordable. This type of loan is definitely more stable than its counterpart, the adjustable rate mortgage. Many homeowners choose this type of loan for more stability, even if it means a higher upfront interest rate and/or higher monthly payments.
The adjustable rate mortgage has a fixed interest rate, but only for a little while, before changing with ups and downs in the market. Many people often go for this one initially because the first interest rate is often much lower than the other interest rates available. However, this kind of mortgage can be a gamble–if the market rates stay low, it’s very affordable, but should they skyrocket, you may not be able to afford your home loan payments.
It’s important to also remember that the kind of mortgage you can get is based on your credit score, so it’s important to maintain your credit card payments and other bills. However, three quarters of consumers have credit scores under 700, so even if you don’t have a perfect credit score, don’t worry too much.