It’s a big decision, one that will impact your future for many years to come. So when it comes to choosing a mortgage, you will want to make sure you fully understand all of your options so that you can pick the right one for you.
Whether you are buying your first home, moving homes, or simply looking to upgrade soon, there are many factors to consider when deciding on a mortgage. But don’t worry — we’ve got all the information you need right here! If this is the first time that you have begun investigating mortgages and the home-buying process in general, then we understand if it feels somewhat overwhelming at first.
After all, there are many different types of mortgages available on the market today with new ones popping up frequently as well.
Selecting a Mortgage: The Basics
Mortgages are loans that are used to purchase real estate. Mortgage rates are primarily determined by two factors: The amount (or principal) that you borrow from the bank, and the interest rate that you pay to the bank.
When considering which mortgage type is right for you, the two most important factors to keep in mind are how much you can afford to pay, and how long the mortgage will last.
A Guide to Mortgage Types
Fixed-rate mortgages are exactly what they sound like — the interest rate on your mortgage is fixed, so there are no surprises along the way. A fixed-rate mortgage is often a good choice if interest rates are currently low, as they can be a great way to lock in a low rate.
However, if interest rates go up (which they often do), then your monthly payments will not change. If rates are low when you lock in your rate, and then they increase, you can always consider refinancing your mortgage to take advantage of the higher rates. However, if they decrease, you would not be able to benefit from that.
Adjustable-Rate Mortgages (ARMs)
ARMs are the exact opposite of fixed-rate mortgages — the interest rate can (and often does) change over the course of the life of the mortgage. ARMs can be a good option for people who are worried about rates increasing over the next several years.
Since rates are expected to rise, you could benefit from this type of mortgage as you might be able to get a lower rate than what you would currently be paying. If rates fall, however, you would not be able to take advantage of this.
Equity Loans and Co-Signers
Equity loans and co-signers are common in refinancing situations, where you have already paid off most of your mortgage. With an equity loan, you are essentially taking cash out of your home by using your equity as collateral.
A co-signer is someone who agrees to take on the debt if you don’t make your payments on time. Using one of these options can definitely help you to save on your monthly payments and shorten the length of your mortgage. However, be aware that you will have to pay back that loan with interest.
Mortgage Conditions to Watch Out For
We’ve talked a lot so far about the positives of various mortgage types, but there are some downfalls as well. One thing to be aware of is that if rates start to rise, you will be stuck paying the lower fixed rate.
If you are considering an ARM, then higher rates would be good for you. Another thing to keep in mind is that certain mortgage terms can lead to homeowners being underwater on their homes.
The loan-to-value (LTV) ratio you have on your mortgage is important to keep in mind, as this will determine how underwater you are if rates do fall and you want to refinance. If you have a high LTV, you will have a harder time refinancing your mortgage to take advantage of lower rates.
Wrapping up: Takeaway
Mortgages are a big decision and one that impacts your future for many years to come. You will want to make sure you fully understand all of your options so that you can pick the right one for you. When it comes to choosing a mortgage, there are many factors to consider.
Fixed-rate mortgages are exactly what they sound like — the interest rate on your mortgage is fixed, so there are no surprises along the way. Adjustable-rate mortgages, however, can be a good option for people who are worried about rates increasing over the next several years. Equity loans and co-signers are common in refinancing situations, where you have already paid off most of your mortgage.