Exploring Different Types of Mortgages & Understanding the Pros & Cons
No matter if you’re a first-time homeowner or an experienced homebuyer, it is essential to research different mortgage types and understand their advantages and drawbacks. Finding the ideal loan will depend on factors like income, down payment amount and credit score.
Fixed rate mortgages provide the security you need when it comes to your monthly payments, making them ideal for younger or more risk-averse individuals who wish to protect themselves financially from changes in variable interest rates.
Fixed Rate Mortgages
When selecting the type of mortgage that’s ideal for you, there are numerous choices available. Fixed rate and adjustable rate mortgages can both be chosen; additionally, the term of your loan also influences which mortgage option is most suitable.
Fixed-rate mortgages offer the stability of an ongoing interest rate for the entirety of their term. Typically, these loans last 30 years; however, shorter options are also available.
Fixed rate mortgages offer greater stability and financial security compared to adjustable-rate mortgages (ARMs), since your payments won’t change unless you refinance your home.
Another advantage of fixed-rate mortgages is their amortizing nature, meaning the loan balance will be paid off completely at the end. Part of each monthly payment goes toward repaying some interest and the remaining amount goes toward decreasing the principal balance. This makes budgeting for mortgage payments much simpler for borrowers.
However, one major disadvantage of fixed rate mortgages is their higher interest rates compared to ARMs. This makes them more costly if interest rates rise significantly in the future.
Furthermore, a fixed-rate mortgage requires you to commit for the long haul, which can be stressful and cause anxiety for some people. This is especially true if you’re uncertain whether you’ll stay in your house throughout its remaining lifespan.
When searching for a fixed-rate mortgage, it’s important to remember that the rate will not be locked in until after the loan closes. Furthermore, some lenders charge an interest rate lock fee to cover these expenses of guaranteeing your loan’s interest rate.
Some mortgage lenders may charge a one-time closing cost or appraisal fees. Over the course of your mortgage, these charges could add up to a substantial amount in total costs.
When selecting the type of mortgage that’s ideal for you, it’s important to take into account your individual goals and needs. For those seeking quick debt repayment, a 15-year fixed rate mortgage could be your ideal solution.
Variable Mortgages
When looking into getting a mortgage, it’s essential to comprehend all your available options. Which type of mortgage best suits your personal preferences, financial situation and attitude towards risk are all factors to take into account when making your decision.
One option for homeowners is a variable mortgage. With this type of loan, your interest rate fluctuates based on the Bank of Canada’s benchmark rate; when they raise it, lenders typically raise their variable mortgage rates accordingly; conversely, when the Bank decreases its benchmark rate, lenders reduce their variable mortgage prices accordingly.
Variable mortgages come in two varieties: fixed-rate and adjustable-rate (ARM). With these loans, your monthly payment remains constant but your mortgage rate changes according to the lender’s prime rate.
Variable-rate mortgages offer the advantage of flexibility, allowing you to make extra payments without fear of incurring a prepayment penalty. Unfortunately, the interest rate on a variable-rate mortgage may be higher than that of fixed rate loans.
Variable-rate mortgages offer the flexibility to convert to fixed rate loans at any time without incurring a penalty, making them ideal for borrowers who may need to sell their property before the end of their term.
Another advantage of a variable-rate mortgage is that you’ll save money over the course of the loan due to not having to pay interest on your original principal amount.
Variable-rate mortgages can be an attractive option for some people, but it’s not always the best solution. Especially those with tight budgets or who worry about adapting to fluctuating interest rates, a fixed-rate mortgage may be preferable.
If you’re uncertain which mortgage type is ideal for you, reach out to a specialist for assistance. They can offer information on the advantages and drawbacks of each mortgage type as well as advice on remortgaging if needed.
Adjustable Rate Mortgages
An adjustable rate mortgage (ARM) is a type of home loan where your interest rates and payments may adjust over the loan’s life. These loans are often available to borrowers with good credit scores, often offering lower initial interest rates than fixed-rate mortgages.
Buyers with a shorter loan term in mind or those planning to relocate within five to 10 years may find an advantage with ARMs. In these cases, low initial rates on ARMs help you save money during this period and may enable you to pay off your loan earlier than anticipated.
Before selecting an adjustable-rate mortgage, there are a few things to take into account. How long you plan on living in your home, your risk tolerance and budget all must be taken into account when making this decision.
The Advantages of Adjustable Rate Mortgages
Adjustable rate mortgages (ARMs) were once a popular type of mortgage due to their relatively low initial interest rates and lower monthly payment, giving homebuyers more freedom in meeting their financial objectives.
However, as interest rates rose in the early 1990s, ARMs began to lose favor. By 2009, they made up less than 2.8% of all mortgages issued.
Today, ARM rates have begun to creep back up. They remain a popular option for many first-time homebuyers and those who plan to move or sell before their initial introductory rate period ends.
Melissa Cohn, executive mortgage banker at William Raveis Mortgage, notes the potential drawbacks of adjustable-rate mortgages: less stability and potential increases in your monthly payment. This makes it harder to budget over the course of an ARM loan and may lead to the need to refinance into a fixed-rate mortgage if circumstances change.
Another disadvantage of ARMs is they typically come with higher fees and charges than fixed-rate mortgages. Furthermore, they may include prepayment penalties if you refinance before it’s paid off, which could cost a considerable amount in additional interest. It’s wise to check with your lender first to determine if these extra costs must be borne before choosing an ARM as your loan type.
Jumbo Loans
Jumbo loans are a type of mortgage that allow borrowers to borrow more money than what conventional loan limits in your area allow. They’re available for both single family homes and second homes alike, making them popular among those looking to invest in real estate.
Jumbo loans can be an attractive option for homeowners in high-priced areas to finance their dream home. However, you should be aware of both the advantages and drawbacks before applying for one.
Jumbo loans offer you a large amount of cash to borrow and the potential for higher credit scores and income flexibility than conforming loans. Furthermore, your debt-to-income ratio may be lower than required for a conforming loan – although some lenders have stricter guidelines regarding this ratio.
Another essential point to keep in mind is having enough cash reserves. That means having enough liquid assets to cover six to twelve months’ worth of mortgage payments plus closing costs. These reserves could come in the form of savings accounts, investment accounts or even a portion of your retirement fund.
Lenders want to guarantee you can make all of your mortgage payments if you experience a job loss or other financial setback, so they will require documentation of your income sources such as tax returns, pay stubs and bank statements.
Jumbo loans require borrowers to make a substantial down payment, usually at least 20% of the total loan balance. Doing so helps safeguard lenders against losing their investment should someone default on the loan.
Minimum credit score required: 700; however, approval can be given with as low as 720. Having a larger down payment is often recommended too, since it will reduce monthly payments and help save on interest over the life of the loan.