A home is probably the most important investment of a borrower’s life. When it comes to home financing, one needs to take deliberate and informed decisions. Therefore, before taking a plunge into the mortgage market, one needs to be aware of options as each one has certain pros and cons. Evaluating variables to arrive at the best option is prudent when taking on large loans such as mortgages.
Fixed rate mortgages
A fixed rate mortgage is a property loan for which the rate of interest remains constant throughout the term of the mortgage, irrespective of fluctuations in market interest rates. The interest rate is usually higher than the initial interest rate of an adjustable rate mortgage. If the interest rate in the market drops, the rate of interest remains the same and cannot be readjusted to the lower prevailing market rate unless you the property is refinanced. However, for predictable interest payments over the long-term or to finance a home when the rates are comparatively low, then this may be the right option.
Adjustable rate mortgage
The interest rate on an adjustable rate mortgage varies periodically depending on the market index and the margin stated in mortgage contract documents. The monthly payments may vary according to how it is adjusted. The initial rate of interest is generally lower than that of a fixed rate mortgage. People are more inclined to these loans when the initial rate of interest is much lower than other mortgage choices. Buyers hope to have better availability of funds to pay the mortgage by the time interest rates rise. People with sufficient income to manage a potentially increasing payment, or who want to sell their home before the first interest rate adjustment tend to benefit adjustable rate mortgages.
While fixed and adjustable rate mortgages are the two basic types of mortgage, there are various types of add-ons that facilitate loan customization to suit specific loan requirements. Here are some of the add-ons to consider.
Fixed payments on a variable rate mortgage
If it is important to know what a monthly mortgage payment is going to be with certainty, then this may be a good option. Borrowers can get a variable-rate mortgage with a fixed payment instead of going in for a fixed rate mortgage. In case interest rates go up, a major portion of the periodic loan payment goes into the interest, and a lesser portion into the principle and vice versa in case the interest rates go down. This gives mortgagees the certainty of what monthly payment amounts will be and the added advantage of paying the lowest possible rate.
Pre-payments can help individuals pay off mortgages much faster. There are options available for making monthly pre-payments or going in for annual pre-payments. However, a more detailed study of the rules governing the pre-payments will have to be done.
While it is not advisable to skip payments, there may be circumstances where payment vacation is the only option available.
Please note that these options are by no means comprehensive. There may be many more options available. However, it does help to narrow down various loan possibilites in order to focus research and perfect the optimal property loan plan.