Mortgages can be classified into two categories: fixed-rate mortgage and adjustable-rate mortgage. A fixed-rate mortgage has an interest rate that does not change for the loan’s entire life. On the other hand, an adjustable-rate mortgage has an interest rate that might change at certain intervals, depending on the terms of the loan agreement.
Other types of mortgage include the interest-only mortgage and the balloon mortgage. An interest-only mortgage allows borrowers to pay only the interest on their loan for a certain period, typically five to ten years. At the end of this period, the borrower must also start paying back the principal.
A balloon mortgage is a loan in which the borrower pays only interest in a set period, after which they must pay back the entire principal balance in one lump sum. This type of mortgage is generally used by people who expect to sell their home or refinance before the balloon payment comes due.
Benefits of fixed-rate mortgages
One of the main benefits of a fixed-rate mortgage is that it provides borrowers predictability. Borrowers know exactly how much their monthly payments will be and how much interest they will pay over the life of the loan. This can be helpful for budgeting purposes.
Another benefit of a fixed-rate mortgage is that the interest rate is set in stone for the loan’s entire life. For borrowers concerned about potential increases in interest rates, this can provide some peace of mind, knowing that their payments will not go up. Borrowers who don’t want to take a chance on future fluctuations might prefer a fixed-rate mortgage over an adjustable-rate mortgage.
Downsides of fixed-rate mortgages
One of the main downsides of a fixed-rate mortgage is that if interest rates happen to go down, borrowers will end up paying more than they would have with an adjustable-rate mortgage. For example, if interest rates are at 5% for a 30-year fixed mortgage but only 4% for an adjustable-rate mortgage, the borrower would be better off with the adjustable-rate mortgage.
Another downside of a fixed-rate mortgage is that it can be difficult to refinance if interest rates go down significantly after you take out your loan. This is because most lenders will only offer to refinance if the interest rate is at least 1% lower than the interest rate on your current loan. If interest rates have gone down significantly since you took out your mortgage, you might not be able to take advantage of this lower rate.
Benefits of adjustable-rate mortgages
One of the main benefits of an adjustable-rate mortgage is that it provides borrowers with lower initial interest rates than most fixed-rate mortgages. Also, for borrowers who expect to sell or refinance before the interest rate on their adjustable-rate mortgage adjusts upwards, this can provide significant savings over the life of the loan.
Downsides of adjustable-rate mortgages
One of the main downsides of an adjustable-rate mortgage is that if interest rates increase, the borrower’s monthly payments and total amount paid over the life of the loan will be higher than they would have been with a fixed-rate mortgage.
Another downside of an adjustable-rate mortgage is that changes to the interest rate cannot be predicted. For example, if you take out an adjustable-rate mortgage when interest rates are low, your monthly payments might increase substantially. This can be difficult for borrowers to budget for.
Which type of mortgage is right for you?
Before deciding on a particular type of mortgage, it’s important to consider your circumstances. If you’re comfortable with your monthly payments going up or down in the future, an adjustable-rate mortgage could be a good choice. But if you want to predict exactly what your monthly payments will be for the life of the loan, a fixed-rate mortgage is a better option.
No matter which type of mortgage you choose, it’s important to shop around for the best interest rate. By comparing rates from different lenders, you can save yourself thousands of dollars in interest over the life of your loan.
In the end, the type of mortgage that is right for you depends on your circumstances. Consider what is most important to you, and then do your research to find the best mortgage for your needs.
Now that you know about the different mortgage loans available, it’s important to decide which one is right for you. Consider your circumstances, and then shop around for the best interest rate.