In many sections of the country the home purchase market has slowed down. Prices of homes for sale seemed to go through the roof. Mortgage interest rates, while still low historically, are up from last year. During this volatile time the homebuyer can choose from a number of options. Fixed rate mortgages give the purchaser of a home a secure way to finance that home. Fixed rate mortgages allow for a more certain base from which to budget house payments for the future.
Recently, much activity in home purchase loans has been in the category of conventional adjustable rate loans. Adjustable rate loans offer some really attractive features. One is a lower entry rate generally than a fixed rate mortgage. There is a designated period of time when the buyer is paying that lower rate. The risk element is that the payment more than likely go up when it starts adjusting. This could really disrupt your budget, since your property taxes and homeowners insurance will be going up also over a period of time. But, the amount of increases could be minimal. The money you save by getting that lower rate up front could result in some real savings. So the real benefit is getting into the house with lower payments thereby affording the new payments.
Another popular way of getting into a home has been the interest only payment option. This can either be calculated on a fixed rate or adjustable rate mortgage. On the fixed rate mortgage program this interest only feature can last for as long as ten years. Then the mortgage payments are recast. If originally the loan was to amortize for thirty years it has to be paid off by the end of the thirty years. The way this happens is that the loan is recast so that the last twenty years of it includes enough to payoff the interest plus that entire deferred principal. This can result in a substantial increase in payments. On the adjustable rate mortgage the interest only option is in effect during the time the loan is in the fixed period time frame. As an example, if you have a 3-year, 5 year or 7-year period of time before your loan becomes an adjustable, the interest only portion covers that phase. When your loan starts adjusting, the deferred principal will be included in the new payments. As in the prior example: if the rates have gone up you will have higher payments.
A variation of these prior themes is the potential negative amortization ARM. This offers a low start rate. The payment is fixed for a certain period usually a year. The interest rate though is not set with the payment. Usually the interest rate adjusts monthly. Therefore, the payment may not be enough to meet the necessary amount to amortize the loan over the 30-year period. If the payment is not enough to amortize the loan as the months go on, then the shortage is placed against the mortgage balance. The lender will allow this to go on only for a definite period of time before there is a recasting of the payment to allow for complete amortization. Let's say your payments have been in a shortfall by the end of each year. At the end of the first five years the loan will be recast so that the loan can be paid off in the 30-year period. This will result in not only the possibility of higher interest rates, but you having to include the deficient balance in the payback resulting in even higher payments.
Between the asking price of homes these days, the costs to get into one, and the projected payments it will take to keep that house up, one could have sticker shock. Initially, the fixed rate mortgage loan may seem less attractive than an adjustable rate mortgage because of the somewhat higher payment. The adjustable rate and interest only mortgages may very well be the way to go, particularly if you looking to move into the next home in several years. But in looking at the overall picture, if you are going to be in the home for an extended period of time, the fixed rate mortgage will be what you are looking to for stability resulting in long term affordability.
A mortgage is essentially a loan to aid you in buying the house of your choice and is usually paid back over a relatively long period of time, commonly twenty five years. It is secured against the property, meaning the lender has the right to repossess the house if you fail to make the scheduled repayments.
There are many types of mortgages available and their suitability depends largely on both your personal and financial circumstances and the type of life you want to lead once you have your mortgage.
There is no shortage of information out there, not to mention competition between mortgage providers, so you have ample opportunities to gather information before deciding on the option that is best for you.
Fixed-rate mortgages allow you to fix the rate of interest you pay on your loan for a set period of time, usually between two and five years, although longer term fixes are available. Your repayments cannot increase during the fixed-rate period, enabling you to have certain knowledge of your monthly commitment and plan your finances around it.
A fixed-rate mortgage protects you against any rise in interest rates during your fixed term, meaning you can save money if interest rates are rising. Conversely, if the interest rate falls you can end up paying more than borrowers on variable rate deals. Most mortgage providers apply early redemption charges to a fixed-rate deal, meaning a charge is incurred should you choose to move your mortgage during that time.
The attractions of fixed rate mortgages are that they make it easier for you to plan your monthly expenses, as your mortgage payments will remain constant during the fixed-rate term. Many prefer knowing exactly where they stand with their personal finances - holidays and car purchase calculations are made easier as you simply deduct this monthly obligation from your earnings.
These mortgages, like any other mortgages, can appear at first to be an enormous, sometimes overwhelming commitment. Over time however, you will find you make your peace with it and despite its strong presence, it will not prevent you living the life you want, rather it becomes a constant companion in that life.
Like anything else, are best approached with a positive attitude. Millions have them and many more will do so this year. Research, advice, a good solicitor and the ability to listen objectively will determine if they are the right choice for you.
Both Bill Wehr & Adam Singleton are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Bill Wehr has sinced written about articles on various topics from Mortgage, Real Estate and Mortgage. Bill Wehr publishes mortgage articles at . Bill has an MBA and is the owner of Great Pacific Northwest Mortgage. Bill Wehr's top article generates over 49500 views. to your Favourites.
Adam Singleton has sinced written about articles on various topics from Mortgage, Culture and Society and Credit Cards. This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice. Adam Singleton's top article generates over 27100 views. to your Favourites.