Although you may already have a mortgage and have purchased a house, you might not be familiar with the payment terms or other loan options available to home-buyers. Based on the history mortgages, these are the most popular types of loans.
30-Year Fixed Mortgage
The most popular type of home loan is the 30-year fixed mortgage. This type of loan is used to finance more than 75% of all home purchases. When you take out a loan, the interest rate you receive will remain the same for the next thirty years. These loans work best when interest rates are low or rising, as it is impossible to predict what they will go. These loans are the best option for those who need a predictable monthly payment and intend to stay in their home for a long time (e.g., 5 to 7 years). This plan will allow you to pay less monthly and earn more interest over the life of the loan.
15-Year Fixed Mortgage
The 15-year fixed mortgage is the same as the 30-year fixed mortgage, but the loan will be paid off in half the time, and you’ll only pay 1/3 of the interest. Although these loans have lower interest rates, the monthly payments are higher than those for a 30-year loan. These loans have the apparent advantage of allowing you to pay off the loan sooner and build equity in your home quicker. If your budget is tight, the monthly payments could be higher.
Adjustable Rate Mortgages are loans that are adjusted at preset intervals to reflect current mortgage rates. There are three options: a 3-year ARM, a 5-year ARM, or a seven-year ARM. An ARM has many advantages. The initial interest rates are typically lower than a 30-year fixed rate. If you don’t intend to stay in the home for longer than the adjustable period, you may pay a lower monthly payment.
If interest rates rise significantly or you cannot move before the end of your ARM period, this could be a risk/disadvantage. You could see your payment increase rapidly without notice, or even for a period, which may make it difficult to pay your monthly payments. This is not the best choice for a home buyer.