Personal Finance and Investing

This is part four in a five part series on what you need to know about mortgages before you buy a home. The housing market is an interesting beast, because it comes and goes, rises and falls, allows some people to flourish and brings others to ruins. If you want to understand how the housing market works, you should begin with an introduction to mortgages.

You may not feel like you are benefiting since you are paying greater interest, but you will be making lower monthly payments thanks to the longer fixed term and you will get a much bigger tax deduction in the grand scheme of things. If you plan on staying inside your home for many years, especially if you believe that your income is not going to be increasing much through the years, then this is probably going to be the best option for your needs. This type of loan also tends to be the easiest for most people to qualify for.

20 year fixed rate mortgage: You can take ten years off of your mortgage and you typically get a lower rate of interest when you are taking out a 20 year loan with your lender. These are not typically offered through as many different lenders and banks, so you may actually have to shop around in order to get what you are looking for. The advantage here with the shorter term is that you are going to have more equity in your home much sooner than if you had a 30 year loan. Your payments, however, are going to be higher since you are paying more off per month to pay the loan off more quickly.

15 year fixed rate mortgage: This loan offers similar benefits to the 20 year mortgage loan, such as a quicker pay off period, higher amount of equity and a lower interest rate, but the monthly payment is going to be even higher, so make sure that you consider the trade off.

Adjustable Rate Mortgage

An adjustable rate mortgage, also known as an ARM has an interest rate that is going to be variable based on the changing rates in the market and current trends in the economy. They typically offer one initial interest rate that is lower than fixed rate mortgages tend to be, but the trade off is that these mortgage interest rates do not offer nearly the same stability as fixed rate mortgages do. If you do not expect that you will be living in a home for a long time, then an adjustable rate mortgage or ARM mortgage may be exactly what you are looking for.

How often your ARM interest rate is going to adjust is actually going to depend on the specific terms of the loan that you take out. You may choose a one year, six month, two year or some other term ARM depending on your lender. There is typically going to be an initial time period where the rate isn’t going to change, which can be from six months to as many as several years.

Similar Posts:

• Short- and Long-Term Mortgage Rates Higher This Week
• Choosing Credit Cards over Personal Loans: What you need to Know
• Mortgage Loans: Questions You Should Ask Your Mortgage Officer
• Dear Credit Karma… Should I Do A Short Sale?
• Variable-rate mortgagees increases