What type of Mortgage should I get?
What is a mortgage?
A mortgage is one of the important financial decisions most of us will ever take. It is important to understand the mortgage process before borrowing money to buy the house.
In simple words, “Mortgage is a loan taken which helps borrowers to purchase a home.” In most cases, collateral (security) for a mortgage is the home itself; if the borrower fails to pay the loan, the lender can also sell the home to get back his money.
A mortgage consists of two elements Interest and principal.
The principal is the money that a homebuyer borrows from the lender; for example, a person borrows $100,000. This $100,000 is the principal owed.
2nd element is interesting; interest is the cost borrower pays for borrowing the money. Borrowers usually pay back the mortgage in monthly installments; these installments consist of principal and interest charges.
Types of mortgage
There are many types of mortgages available. Here are the most common types of mortgages available for homebuyers in the USA.
A fixed-rate mortgage is the most common type of mortgage used to buy homes in the USA. A fixed-rate mortgage is available for 15 years and 30 years terms. In a fixed-rate mortgage, interest rates and monthly payments remain the same throughout the loan’s life. A fixed-rate mortgage makes it easy for borrowers to make their budget for monthly payments. A fixed-rate mortgage is suitable for borrowers with limited monthly income and borrowers who want to live in one place for a long time.
How does interest rate work for a fixed-rate mortgage?
The interest rate is decided at the start of the fixed-rate mortgage. Repayment time for a fixed-rate mortgage is 30 years, shorter spans of 10, 15, and 20 years are also available, but shorter loans will have larger monthly payments.
A borrower gets a fixed-rate mortgage of $200,000 for 30 years at a 4.5% interest rate. If we calculate the monthly payment, he will pay $1013 every month. (Down payment, taxes, and closing cost is not included in this)
For calculating a mortgage, you can use this website https://www.mortgagecalculators.info/
This is an authentic website that gives exact monthly payments, tax amounts, and a lot of other valuable information about the mortgage. This website will be helpful while applying for a mortgage.
Adjustable-rate Type of mortgage
An adjustable-rate mortgage interest rate is fixed for the initial period but after the end of that period interest rate goes up or down; it resets periodically at yearly or on monthly intervals. Interest rate keeps fluctuating with market interest rates. The initial interest rate is often below the market rate, making adjustable-rate mortgages affordable in the short term. Still, in the long term, adjustable-rate mortgages can be less affordable. An adjustable-rate mortgage is a suitable option for those who have plans to move to any other place in the next few years or for those who have plans to sell their home after a few years.
5/1 Adjustable-rate mortgage means that interest rate will be fixed for 5 years, and after the end of this period, the interest rate can be adjusted once per year. This means monthly mortgage payments could go up or down to account for changes to the interest rate.
A mortgage is a loan in which there are limited or no monthly payments in the initial period, but in the end, the borrower will pay off the full balance in a lump sum. The interest rate offered is relatively low. A balloon mortgage can be good for those who want to sell their house at the end of the mortgage period, or they are expecting huge income at the end of the loan period. In balloon mortgages, homeowners have very little or no equity at all. A balloon mortgage is the riskiest mortgage.
How Down payment works?
A down payment is an amount that a borrower put toward the sale price of a home. The down payment amount is based on the type of mortgage. That can be 5% to 20%; some government-backed loans can be obtained at as low as 3.5% down payment. Even for some individuals, it is also possible to get a mortgage for a 0% down payment (VA Loans).
How much down payment is good can be a difficult question because some people say that bigger is better while others believe that down payment should be as low as possible.
A big down payment can help borrowers in many ways; if a borrower puts more down, lenders can offer him a low-interest rate as he is a low-risk borrower. Another good thing about paying a big down payment is that monthly payments will be smaller, and most importantly, the larger your initial down payment, the sooner you build a significant amount of equity in your home.
Smaller down payments also have some benefits which are
If you are going to save for a huge down payment, it may take a long time to save big cash; therefore, it is better to buy a home by offering a small down payment. You should not invest all savings in the down payment; you must have some cash for other purposes.
The final decision depends on the borrower what suits him. If someone thinks he can manage his budget by paying a huge down payment, he should go for it, but if they think paying a huge down payment will disturb his budget, he should go with the smaller down payment.
Best time to apply for a mortgage?
The right time to apply for a mortgage will be different for everyone. Credit history, savings, employment history, and market conditions are factors that play an important role in deciding that someone should apply for a mortgage or not. Generally, lenders receive new applications at the start of the month, and in the middle of the month, they collect all relevant documents and finalize the mortgage process at the end of the month.
In the current market situation, according to the most reliable financial magazines Wall Street Journal and Bloomberg, in the last
quarter of 2020, mortgage rates are touching low-interest rates record 30 years fixed mortgage drops to 2.67%. According to the mortgage reports (USA-based magazine), interest rates touch the lowest limit 1st time in the last 30 years, making it favorable for buyers. They further added that year 2020 has been favorable for the buyer so far.
According to current market statistics, it’s the best time to get a mortgage, as the interest rate is too low. Anyhow, there is no guarantee how long these rates are going to stay at this point; it will be a great idea to go for buying a new home.
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