Picking the best mortgage takes some education about mortgages as well as keeping an open eye and ear. The most basic thing you need to know about mortgages is that they come mainly in two types: one with a fixed interest rate or one with an adjustable interest rate.
Fixed Rate Mortgage Versus Adjustable Rate Mortgage
For the most part, mortgages come in two ways - they either have a fixed interest rate or an adjustable interest rate. Below find a basic definition of these two mortgage options as well as some of the pros and cons for each.
* For the fixed mortgage, the interest rate is fixed for the life of the loan. The most common fixed mortgage is the 30 year fixed rate mortgage.
The main pro of the fixed rate mortgage is that the interest rate is constant. You will always know what your payment will be in terms of your principal and interest. Your payment may change if you have an escrow payment included in your mortgage and your taxes change or your insurance premium changes. But as far as the interest rate and the payment associated with the interest rate, your payment will never change. You can set your montly househld budget accordingly.
The con of the fixed rate mortgage is that they typically have a slightly higher interest rate of all the types of mortgages you can get. However, this is not that big of a deal especially if you qualify for a particular mortgage payment with a fixed rate and you are happy with the payment. If you are happy and can easily afford the payments then the slightly higher interest rate is not really a big factor.
* For the adjustable rate mortgage - ARM - the interest rate is generally fixed for some specified period of time and then it adjusts for the rest of the term of the mortgage. The typical length of time for an adjustable mortgage is 30 years with the fixed period being around 5 years. They can range fixed for as little as one month to up to 10 years.
Pros of the adjustable rate mortgage is that they have a slighly lower interest rate than a fixed rate mortgage. Also, the rate on an adjustable rate mortgage can go down if the interest rate market when the adjustable mortgage adjusts.
The main con of the adjustable interest rate is that if you do not refinance it before the end of the fixed period and interest rates are worse than when you got your mortgage then your mortgage payment will adjust up. It will adjust up according to the adjustment caps that came with your mortgage.
There are many resources on GetPreQualified.com to help you learn more about the home buying process and mortgage loan programs. Visit: Steps To Home Buying and Mortgage Loan Programs for more information.
Article by Dale Stouffer, Mortgage Broker. Dale has been a mortgage broker since 1996. This Article is designed to be of general interest and should not be considered accounting, legal, or tax advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal attorney, tax adviser, or accountant.
