A home mortgage will probably be the biggest debt that you will ever confront and hence it is important to get it right from the onset to avoid any potential traps that borrowers may find themselves in. The mortgage industry is a competitive one, with several companies fighting for your business with a plethora of home loan products. With such variety of products available today, borrowers often face a dilemma when it comes to picking the right mortgage.
Choosing the right mortgage will depend upon a number of factors and investment objectives of the borrower. Here are two of the most popular options when it comes to home mortgages and we will explore how to determine if the selected home loan product is the right fit for you – or not! Most mortgages available today fall under one of two loan variants that are discussed at length here. The first is a fixed; the second is an adjustable rate mortgage.
Fixed Rate Mortgages
Fixed rate mortgages are traditional mortgages which stipulate a fixed interest rate applicable over the specified life of the loan. These are usually long term loans ranging between 10 and 30 years. The interest rate is not affected by movements in the federal interest rate and the monthly interest and principal payments remain fixed over the life of the loan. In other words: what you see is what you get.
A fixed rate mortgage is most suited towards home buyers who intend to live at the premises for a long period of time. The assured payment structure offers stability from the long term fluctuations of interest rates while at the same time offering borrowers the flexibility of reducing their principal balances by paying more than the required minimum monthly payments.
However, the stability that fixed rate mortgages offer do come at a cost. The total interest payments over the term of the fixed rate mortgages tend to be higher than other variable rate mortgages. Furthermore, borrowers locked in to a fixed rate mortgage are not able to take advantage of a drop in rates like we are seeing right now but are stuck with a mortgage whose rate was determined when the loan was issued.
In a nutshell, borrowers who intend to live in the house they are purchasing for a long period of time and would like the assurance of fixed payment amounts over the life of the loan would find fixed rate mortgages their best option.
Adjustable Rate Mortgages
ARMs or Adjustable Rate Mortgages are home loans whose interest rates are determined by prevailing market conditions. These loans generally start off with a low rate that is below the indexed rate for a specified period after which interest rates are reset to the indexed rate plus the margin.
Adjustable Rate Mortgages are most suitable for borrowers who expect their income to increase over time so that they are able to make increased payments if interest rates rise. It is also a better option for borrowers who do not intend to hold on to the property they are buying for a very long period of time. This is because such an investor doesn’t need the assurance of fixed payments over a long period.
However, ARMs can be sometimes misleading to borrowers. For example, the initial low rates that are paid on ARMs could be applicable for a very short period such as 6 months to a year after which indexed rates apply. If a borrower is not careful, he or she could find themselves having to make increased payments before they are ready for it. This is part of the reason many people across the fruited plain have entered into dark territory because now they cannot afford the home they thought they could afford. In essence, grown adults did not do their homework.
Periodic and lifetime caps on the interest that can be charged by lenders on ARMs do protect a borrower from wild interest rates swings but be wary of payment caps that limit monthly payments and prevent the loan from being paid off early.
Different mortgages come with various terms and conditions and it is absolutely essential that borrowers fully read and understand the fine print before committing to a home loan. Proper financial planning and seeking assistance if the situation gets out of hand are other steps that borrowers need to follow. After all, at the end of the day, a borrower’s personal circumstances will decide what loan product is the best for them.