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With a wide variety of mortgages
available, how do you know which is the best one for you? Well,
the truth is, that everyone’s situation is different, so you
should consult your lender before deciding which is the best
mortgage for you. However, here is a brief overview of the
different variety of mortgages that are available:
Fixed Rate Mortgage: With a fixed-rate mortgage,
the interest rate will be established, and remain the same
throughout the duration of the loan. Since the interest rate
does not change, the monthly principal and interest payment will
be the same over 15 or 30 years. To a borrower the advantage is
that the rate will remain constant and the monthly payment will
remain the same. Thus, it reduces the risk that the borrower may
be called upon to make the higher interest payments than they
counted on. The tradeoff is that the lender is taking the risk
that interest rates will rise and it will get stuck carrying a
loan at below market interest rates. Since the lender is
assuming the risk, they usually demand a higher interest rate on
a fixed loan, which means higher monthly payments than the
initial rate and payments on adjustable or balloon mortgages.
Adjustable Rate Mortgages: An adjustable rate
mortgage offers a fixed initial interest rate and a fixed
initial monthly payment. However, both are fixed for a short
period of time – not for the entire life of the loan. With an
adjustable rate mortgage, after the initial fixed period, both
the interest rate and the monthly payments adjust on a regular
basis to reflect the current market interest rates. Each lender
may also use different adjustment periods. Also, some adjustable
rate mortgages limit the amount that the rates can increase or
decrease on any adjustment. An adjustable rate mortgage usually
carries a lower initial interest rate and lower initial monthly
payment for the buyer in exchange for the buyer taking the risk
that rates may rise. Since the buyer is assuming the risk, they
may receive a lower monthly payment and initial rate.
Balloon Mortgages: A balloon mortgage has a fixed
interest rate and fixed monthly payment, but after a fixed
period of time, the entire balance of the loan becomes due at
once. As a practical matter, the homeowner is unlikely to have
enough cash to pay off the entire loan balance after 5 years, so
they will have to go out and arrange a new mortgage. This is a
special type of conventional, fixed rate mortgage with a much
shorter term. In a balloon mortgage, the terms and payments are
usually the same as their conventional loan counterpart, and the
interest rates are typically lower. However, the balance is due
in full on the loan at the end of a specified, much shorter
term.
Speak with your lender to discover the type of mortgage that
will best fit your individual needs. As a real estate
professional, I am experienced in helping people find reliable
lenders. Contact me to find a reliable and experienced lender.
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