There are a few different types of mortgage loans that I would like to talk about because I feel everyone should know the pros and cons of each. There are ARM rates, fixed rate mortgages and interest only loans that seem to be the most popular.
Fixed Rate Mortgage
A fixed rate is the most basic type of mortgage interest loan you can get. It's fixed for all 30 years of your mortgage and won't change for anything. You can also refinance with a fee if interest rates lower enough to make it worth it for you. I especially recommend a fixed rate in the economy because rates are so low as it is. If you use a mortgage calculator you'll probably see that this is the best option for you because it is for most.
ARM Rates
ARM stands for adjustable rate mortgage because it adjusts each year as interest rates adjust. That means if you get a 5% interest rate today and it's only fixed for 1 year then it will adjust each year up or down. Some people li ke gamble and those are the only people I recommend this type or mortgage to. The only other time I would recommend this type of mortgage is when the current interest rates are above 10% because at least they have a chance to lower at that point.
You can get an ARM rate fixed for 1 year, 3 years, 5 years and sometimes even 10 years. The better they sound the higher they start. So if you wanted an ARM rate and only fixed for 1 year then it's the biggest risk which makes it the lowest rate to start. The 10 year fixed would probably be a similar rate to the fixed mortgage anyways so it wouldn't be worth it.
Interest Only Loan
This is the most ridiculous loan I've ever heard of and I can only think of one scenario where it might be worth getting. It's exactly what it sounds like because you don't have to pay the principal portion of your mortgage payment. Look at an amortization schedule from a mortgage calculator to see how much principal and interest m ake up your mortgage payment. Then subtract the principal and pay tha t amount for 5 years.
However, once the 5 years is up you get all the 30 years worth of principal squeezed into the 25 years that you have left on your mortgage. Plus, it's an adjustable rate and who knows what will happen to interest rates in 5 years. So you'll have to add principal and adjust your interest rate to almost double your mortgage payment for the next 25 years.
Having said that, the only way I see this as a good loan is if you're an investor that flips houses. Some investors will buy a home to fix a few things and sell it at a profit. This type of investor wouldn't care about paying down principal because they just want the lowest possible payment to keep their borrowing power high. That way they could buy a second property without the principal added into their monthly expenses. The more expenses the bank sees the less you can borrow.
I highly recommend a mortgage calculator to help you in this process. It will show you all the different monthl y payment amounts so that you can decide, with knowledge, the best option for your situation.
A Mortgage Calculator will help you decide which interest rate is the best for you. If you plan on buying a second home then you want to keep your Borrowing Power as low as possible so that the bank will allow you more of a loan. The best two types of Current Interest Rates are an ARM rate and a fixed rate mortgage.
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