Securing financing is a crucial step toward homeownership. Choosing the right mortgage will make it easier to keep up with monthly payments. Here are a few things to keep in mind.
Fixed Rate vs. Adjustable Rate Mortgages
All home loans fall under these two categories, or a hybrid category.
Fixed rate mortgages (FRMs) have the same interest rate throughout the loan’s life cycle, as the name suggests. This means that your monthly interest won’t change during the amortization period, not even for a 30-year loan. The main advantage of this type of loan is predictability – it makes it easier for you to set a monthly budget, and to stick to it.
However, you won’t be able to take advantage of fluctuations in the market. For instance, if interest rates go down, you’ll still have to pay the fixed rate on your mortgage.
The interest rate for adjustable rate mortgages (ARMs) changes over the loan’s life cycle. Often, the rate changes each year after the initial period where the rate is fixed. This is commonly referred to as a hybrid loan – it starts off with a fixed rate before it becomes adjustable.
For example, a 5/1 ARM will have a fixed interest for the first five years before it becomes adjustable each year afterwards.
The main advantage of this loan is that it allows you to take advantage of fluctuations in the market.
Choosing the Best One
Which one is for you? It depends on your personal preference, financial capacity, and how long you intend to stay in your home. If you like a certain amount of predictability in your monthly payments, then an FRM is the way to go. But if you’re more of a risk-taker, an ARM might be suitable.
If you will only be staying in your home for a few years, then an ARM is a sensible option. Likewise, if you intend to live on the property for more than five years, an FRM might give you more stability.
Lastly, if you believe that you can afford increased payments once the fixed rate period is up, then an ARM might be a good choice.
If you see yourself taking on additional debt in the form of car and student loans in the foreseeable future, a hybrid loan lets you set aside money during the initial phase in preparation for those costs. But if you have no way of knowing what your financial situation will be in a few years, an FRM might be your best bet.
Finding the Right Lender
Shop around for a lender before you start looking at homes. This lets you know which lenders offer the best rates. Don’t hesitate to ask questions and, more importantly, don’t forget to read the fine print before signing.
Make sure that your credit score is in good shape before talking to lenders. Build up your savings and avoid making major purchases in the months leading up to your loan application. You should also pay off debt and consolidate existing ones. This will increase your chances of getting approved for a mortgage.
Purchasing a home doesn’t need to be difficult. If you’re in the market for a new home in Sebastian, Vero Beach, Micco, or any other community in Indian River County and Brevard County in Florida, Francine Kidder will be happy to help. Just call 772 925 9587 or send an email to Francine@FrancineKidder.com.