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The following is a guest post. Enjoy!
Home ownership is one of the cornerstones of America, if not the cornerstone of American life. There is no other symbol that defines what it means to fully capture the American dream than that of home ownership.
The primary way that people chase their dream of home ownership is by means of a mortgage loan. A mortgage is a loan taken out from a bank based upon a person’s credit history and their level of income. There have been times when it has been very easy for a person to get a mortgage, and other times when it has been virtually impossible for the average person to get a mortgage to buy their dream home.
Mortgage Selection Tools
One of the best tools a person can have when it comes to buying a mortgage is a reliable, handy mortgage calculator. A mortgage calculator is one of the few tools a person can use to help them prepare for the process of attaining a mortgage. When taking on any new challenge, such as buying a home or purchasing any type of real estate, it is always worth it to do proper research and use due diligence when approaching the situation. There are many different types of mortgages, some more risky than other, but they all get the job done.
The Fixed Rate Mortgage
The fixed rate mortgage is the simple mortgage that many of us grew up knowing about. The fixed-rate mortgage can be very easily explained as a simple loan with a fixed, stable interest rate that determines what our monthly payment will be. The beauty of this type of mortgage is that for the entire life of the loan, you have the same mortgage payment, and it becomes a game of how many payments do you have left on your mortgage before you pay it off, rather than a game of what exactly will my mortgage payment be this month, as it is with many other types of mortgages. The fixed-rate mortgage usually has a life of 30 years or 15 years, and is pretty flexible for you to pay it off early.
The Adjustable Rate Mortgage
Adjustable rate mortgages are one of the more flexible mortgage options in good financial times. The adjustable rate fluctuates with the economy (more specifically, with the prime interest rate set by the Fed), and often leaves the homeowner in a financial situation they did not plan for.
The adjustable rate is both a beauty and a beast, all at the same time. In good times, the rate is often low, which in turns allows the person mortgage payment to be low and very bearable. But, in bad economic times, this rate often rises unexpectedly and puts the person who has the mortgage in a bad financial position. Adjustable rate mortgages are good for people who do not have any other option, but they should use a mortgage calculator before they sign the documents to make sure they are getting the best deal they can. It would also be a smart move to later move to a fixed-rate mortgage if possible for the security it provides.
How about you all? What strategies or tools do you use to obtain a mortgage that best suits your needs? Do you prefer fixed rate or adjustable rate mortgages?Â
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
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@ Deciding between fixed and adjustable rate mortgages –Â
- Deciding between the two types of mortgages (fixed and adjustable rate) can be a fairly difficult proposition.Â
- On one hand, it’s a little frightening to think about being “locked” in to a set mortgage for such a long period of time (30 years) with a fixed rate mortgage.Â
- On the other hand, it’s also very tempting to get an adjustable rate mortgage since the rate is set enticingly low in the first few years of the loan.
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However, I believe that as a general rule of thumb, the majority of home buyers should be using a fixed rate mortgage. The primary reason for this is that it forces a home buyer to truly get their finances in order before committing to buying a house. In other words, a fixed rate mortgage makes sure he or she (the home buyer) truly has enough money to afford the true cost of the house, and not just some temporary low rate set forth by the adjustable rate mortgage.
- Even though I believe that most people can benefit more greatly from a fixed rate mortgage (this is what I would choose in buying a home as well), there are some times when I do believe that adjustable rate mortgages are beneficial. These are listed below:
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When you only plan on living in a house for 5 years – Since you’ll only be living in the house for a relatively short period of time before selling, you’ll likely only be paying mortgage payments during the low, introductory interest rate period. Thus, you don’t need to worry about the interest rate adjusting to something that you cannot afford.Â
- A word of caution though with this tact – if you do not plan on living in a house for a minimum of 5 years, you would actually be better off renting instead of buying.Â
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When the terms of the adjustable rate mortgage are such that it prevents huge jumps in interest rate over the life of the loan – In some special cases with adjustable rate mortgages, the amount that the interest rate on your loan can fluctuate is capped both at a per year and per-loan-lifetime basis. If current market fixed rate mortgages carry a 5% interest rate and your adjustable rate mortgage interest rate increase is capped at 2% for the lifetime of the loan (but starts at 3% interest), it will ultimately be cheaper to go with the adjustable mortgage. It’s all about reading the fine details VERY CAREFULLY though!Â
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