Types of mortgages available
If you are looking to buy a new home or property, mortgages are
in the forefront of your mind. Mortgages are long-term loans,
usually from a bank or a mortgage broker. Mortgages are repaid
over long periods of time, because these loans are for very
large sums of money. There are many kinds of mortgages available
to buyers, each with its own risks and benefits.
Fixed-rate mortgages are most common. These mortgages keep the
same interest rate over the course of the loan, and monthly
payments stay the same. The normal period to pay off these
mortgages is 15 or 30 years. These mortgages are particularly
affordable when buyers can lock in to low interest rates.
Adjustable-rate mortgages usually start with lower interest
rates than fixed-rate loans. This appeals to buyers during the
initial loan period. However, these rates may rise over time,
and buyers may end up paying more on these mortgages than
originally anticipated. Typical adjustable-rate mortgages
include 3/1, 5/1, 7/1, and 10/1, and they have fixed rates for
the first three, five, seven, or 10 years, respectively. After
that, the mortgages' interest rates adjust annually.
Adjustable-rate mortgages do come with caps. This prevents the
adjusted interest rates from going too high. Research the caps
before deciding on these types of mortgages.
Another popular form of adjustable-rate mortgages is the
interest-only loan. For a certain period of time, borrowers pay
only the interest on these mortgages. After that time, the
interest is adjusted. However, during the interest-only period,
buyers can pay down some of the principal on these mortgages as
well. Normally, interest-only mortgages have initial low rates.
Any of these mortgages has its risks. Here are a few examples.
Some borrowers are unable to afford fixed-rate mortgages,
particularly during time periods when interest rates are high.
Adjustable-rate mortgages may experience significant rises in
interest rates over the life of the loan. This can startle
borrowers, as payments increase sharply. These factors are
important to consider when you are shopping for mortgages.
If you don't plan to keep the new property for a long time,
adjustable-rate mortgages might be your best bet, since you
might sell before the rates go up. On the other hand, if you
hope to keep the property long-term, fixed-rate mortgages might
make more sense.
A banker or broker can help you decide which mortgages are best
for you depending on your needs and financial situation.