Mortgage Types: What it means for the Would-Be Home Owner

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Some Information on What You Should and Shouldn’t Know About Mortgages

The fact is that the type of mortgage you choose should always be based on your current financial situation and your best estimate of what it will be in the near future. It also depends on you comfort level and on how long you are planning to stay in the mortgage.

This article will be mostly about the types of mortgages and some of the reasons why people choose those particular mortgages. Before going to estate agents Manchester, using this with other information on the closing costs, interest rates and the lender fees shall give you a better understanding of the mortgage landscape.

Types of Mortgages:

Basically there are two types of mortgages, the fixed mortgage and the Adjustable Rate Mortgage (ARM). There are variations within each category but they usually go by two determining factors. How predictable and affordable the loan payments are.

Fixed Mortgage:

Most borrowers go for fixed rate mortgages because in principal the interest rate payments are steady and mostly predictable. That being said, the borrower usually has to pay a higher interest rate then in an adjustable mortgage.

Why You Should Go for a Fixed Rate Mortgage:

The fixed rate mortgage offers the borrower a much easier budgeting mainly because the principal and the interest portion of the mortgage does not change even if the price of the interest rate fluctuates in the marketplace.

Why You Should Avoid a Fixed Rate Mortgage:

One of the reasons people avoid the fixed rate mortgage is because it comes with a higher principal and interest payment initially. In order to take any sort of advantage of a decrease in the interest rate, a person will have to refinance and bear the costs of refinancing.

People Who Go for Fixed Rate Mortgages:

People who go for the fixed rate mortgage are mostly those who plan on mortgaging their home for several years and are comfortable with the fact that the interest payments will remain steady throughout that period.

Adjustable Mortgage:

Borrowers choose the adjustable mortgage rates because the initial interest payments are lower. This makes it more affordable for the borrower at first, but it also comes with a few risks. For example, like in the fixed rate mortgages, if the interest rates fall, that leads to the borrower missing a chance to get a lower interest rate without having to refinance. With the ARM when the rate climbs upward the borrower may find themselves having to pay a higher interest payment then before.

Depending on the loan, the adjustment date differs and can be carried out in the first year, this eventually results in the borrower having to pay a significantly higher interest rate payment. This can also result in an increased loan balance.

Why You Should Go for an ARM?

The adjustable rate mortgage comes with lower interest rate payments that could drop even lower in the future without having to refinance.

Why You Should Avoid an ARM:

In case the market rates increase the interest rate payments will also increase automatically.

People who go for the ARM:

Those who are confident that they will be able to carry on making the interest payments even when the rates increase or believe the rates are going to remain where they are go for the adjustable rate mortgage. People usually go for the ARM when the real estate market is steady or increasing.

Why do Different Mortgages have Different Rates?

The difference in the rates mainly depends on who takes more risk in case of an interest rate hike, the borrower or the lender. Adjustable rate mortgages usually come with a lower initial rate, that’s mainly because these loans are given to the borrower who then assumes a greater share of the risk in case of an interest rate hike.

Fixed rate mortgages come with a higher interest rate, that’s because the lender mostly loses the ability to gain higher returns if the rates do increase.

Author’s Biography:

Sarah writes about a wide range of topics from marketing, finance and technology to design and home decor. She enjoys keeping up with the latest online real estate market trends, likes to share her findings in her articles and blogs and can recommend good estate agents Manchester. For more information you can visit this page