How to Choose the Best Mortgage for You
Options. There are many when it comes to mortgages. To keep from getting too overwhelmed, you need to determine exactly what your needs are for your personal situation.
The real estate world is replete with terms many of us find confusing and when the word “mortgage” is bandied about, it might make some prospective homeowners a little nervous, but there really is no need to be. You just have to keep a few things in mind as you start to shop around for the perfect mortgage fit for you and your family.
The right mortgage can have you owning your home sooner
Choosing the right mortgage will directly affect your bottom line and that needs to be healthy for you to own your home sooner. A mortgage is a marriage of two individual parts -- the principal and the interest and you need to know how both of these will be paid down.
The ideal situation would be to minimize paying the interest and maximize paying the principal, but there are various roads to get to that destination.
Here is a little insight into what some terms mean and how they will affect your situation:
The amortization period is the length of time you agree to pay off your mortgage. That’s usually 25 years in the US, but some periods can be longer and some shorter. Ideally, lenders like to stick to 25 years or less. You may need a 20% downpayment if you go longer than 25 years and will likely have to pay an extra mortgage fee.
The amortization rate will decide how much interest you will pay during the life of the mortgage. The longer the amortization, the more interest you’ll be paying.
A mortgage amortization is broken down into terms. A term locks you into a specific interest rate for the duration of that term. The length of term chosen depends on what you think interest rates will do during the term. Most people choose five-year terms. After your term is up, you can shop around for a better mortgage rate.
Answering some pointed questions
There are a few questions you should answer to make finding the right mortgage easier for you.
How long am I planning on staying in this home? This is a big factor in choosing a mortgage. If you don’t plan on this home being your forever home and have a goal of staying there less than 10 years, you might want to consider a loan with a variable rate. If you’re shopping for your forever dream home, a fixed rate mortgage might be best.
Am I willing to accept some risk? Some people need to know to the cent what they will be paying each month over the mortgage term. If that’s you, a fixed rate mortgage might be the right choice for you. On the other hand, if you one to take more risks, then you might opt for a mortgage with a variable rate -- a rate that fluctuates with the market.
How much cash do I have for costs upfront? The more money you have for a downpayment, the lower your monthly mortgage payment will be. On the flip side, a higher monthly payment may shorten the loan term from 25 to 15 years, so you’ll be able to pay the loan off quicker.
Open or closed mortgage?
You can repay the loan, in part or in full, at any time without penalty with an open mortgage. This type of mortgage is more suited to homeowners who are planning to sell sooner, rather than later. Many lenders will allow you to convert an open mortgage to one that is closed.
A closed mortgage is one with a specific term. You won’t be able to pay off the balance until the mortgage maturity date. You will have to pay a penalty to do so. A closed mortgage usually offers the most attractive interest rate.
Fixed or variable mortgage?
The criterion for a fixed rate mortgage of 30 years equals the yield of a 10-year bond. Fixed rates rise and fall with bond prices. The gap between the two indicates the risk investors are willing to take when they move from a secure investment like bonds to one that is less secure like mortgage securities.
Changes in money market conditions affect how variable rates are priced. If the prime rate escalates, so too, then, will variable rates.
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