One of the causes for the housing crisis, in my opinion, is that most home buyers did not understand the differences in the types of mortgages.
There are really two main types of mortgages; a fixed-rate mortgage and an adjustable-rate mortgage.
Fixed-Rate Mortgages have one set interest rate with a fixed monthly payment and is fully amortizing, which means that the loan will be paid in full over a given number of years. The most common terms are 15 and 30 year lengths. A portion of each payment goes towards the principal balance and the remaining goes towards the interest of the loan. Most loans allow you to make additional payments toward principal as you wish.
Adjustable-Rate Mortgages are often referred to as ARM's. They have interest rates which go up or down based typically on the Prime rate. Therefore, your interest rate has the ability to change from year to year based on the movements of the prime rate. ARM's help lenders cover the cost of lending money in an changing economy by transferring a portion of the interest risk to you. So instead of having a 6% fixed rate loan on their books when prime is at 8%, they entice you with a lower initial interest rate which could rise to help cover cost.
So the question is which one should you get? My general rule of thumb is to stick with a Fixed Rate Mortgage. Adjustable rate mortgages definite serve a purpose and can be very valuable for people expecting a pay increase or an influx of cash. This way they would get a lower interest rate and qualify for a large loan at the present time. For most clients, the fixed-rate mortgage is a required peace of mind knowing that your principal payment will not change in the future.
The only thing left to determine is the length of the fixed-rate mortgage. The most common is 30 years because it allows you to qualify for a larger loan amount. Here is the difference in what you repay.
30 Yr Fixed Rate Mortgage at 6%
- Principal and Interest Payment - $599.55
- Repayment - 2.158 times original loan amount
15 Yr Fixed Rate Mortgage at 6%
- Principal and Interest Payment - $843.86
- Repayment - 1.518 times original loan amount
That's a 42% difference in the end!
Bottom line, sit down with qualified professionals for the small details but hopefully you have gotten a better idea of what your options are.
This Blog is written by:
Nick Ratliff, Realtor
Keller Williams Bluegrass Realty
Nick@FindMyKyHome.com
Your Center for Real Estate Information
www.FindMyKyHome.com
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