Getting a mortgage is a huge step for any homeowner, and there are enough types of mortgages out there to thoroughly confuse even a seasoned homeowner.
Every type of mortgage has specific costs and benefits associated with it, and it can be hard to determine which one is the one that will best serve your short- and long-term interests.
If you’re a first-time buyer looking to move soon after purchase, for example, your needs will be very different than someone buying a home that they’ll be settling into for the long haul and renovating to fit their needs.
If you’re looking to get a mortgage on your home, whether it be your first, second, or however many, take a look at this breakdown of each of the 4 mortgage type’s pros and cons first:
A fixed-rate mortgage is one whose interest rate will never change: it’s locked into place the moment you sign on the dotted line. The term length is predetermined, so this kind of mortgage offers you the security of certainty: you know exactly how much you’re going to pay, and for how long, from the get-go.
Fixed-rate mortgages are very commonplace in the U.S., but they typically require a pretty decent credit score to obtain; if you have one, though, and the current interest rates are favorable to you, you should consider one of these mortgages.
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Adjustable-rate mortgages, then, are the opposite: mortgages whose interest will fluctuate based on market trends. This may sound scary, but most of these mortgages come with a fixed-rate initial period, with a lower rate for a set period of time, commonly 5 years.
This is called a hybrid ARM, and is usually expressed in terms of two numbers with a slash between them: the first number is the amount of time the rate is fixed, and the second indicates how frequently the interest rate adjusts afterward.
This means that if you’re not looking to stay in this home for very long, you can get what is effectively a 5 year, fixed-rate mortgage at a very low-interest rate, and then move before the interest rate changes. ARMs are best for people who are looking for something more short-term out of their mortgage, or those who can handle major fluctuations if they wind up sticking around in the home for longer than anticipated.
FHA loans are loans insured by the Federal Housing Administration. They are based on the idea that the government eats some of the risks for lenders so that they can lend to borrowers with lower credit scores or those who are unable to make a large down payment.
The borrowers’ credit score and down payment size are inversely proportional: if you have a credit score above 580, you only need to make a 3.5% down payment with this kind of loan.
The downside to these loans is that the borrower has to pay mortgage insurance premiums along with their usual payments; these loans would be too risky otherwise for lenders to consider them worthwhile. The amount of time that a borrower needs to pay these insurance premiums can be lowered with a larger down payment, however.
FHA loans are good if you are lower-income, and they have options that can allow you to tailor the mortgage so that further down the line, you’ll wind up with a mortgage that still works for you, despite any changes to your income situation.
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Reverse mortgages are a rarer form of mortgage that is specific to people 62 and older. The idea is this: when you’re older you have less (or even zero) income, but you still have plenty of expenses. What many people do have is a house, with loads of equity tied up therein.
So, if you plan on living in that house for a long time, you can take out a reverse mortgage, which pays you incrementally while you are still living in the house.
The payments only start when the house is no longer your primary residence, for whatever reason; most wind up selling the house to pay off the reverse mortgage when this happens. If you’re an older person who needs some cash and whose only major asset is your house, click here to learn more: https://reverse.mortgage/how-does-it-work.
Before taking out a mortgage, it’s critical to weigh your options. Any type of financial transaction that involves your home needs to be considered carefully and thoroughly, and with mortgages, the choices you make when taking out your mortgage can have large ramifications down the line. Refinancing is, of course, always an option, but it’s one that creates a lot of headaches; if you get it right the first time, you won’t have to worry about the financial situation surrounding your home again. So, take the time to figure out what option is right for you before signing on for any mortgage.