Which Type of Mortgage is Best for You?
With mortgage rates still at an all-time low and homebuyers snatching up real estate while the prices are still low, the next logical step that many new homeowners face is what type of mortgage to pick. There are a few different choices currently out there when it comes to picking out a mortgage, and while it’s always possible to refinance later on down the line if your situation changes, choosing which mortgage best suits you and your financial capabilities is a major decision to make when buying a home.
The two most common types of loans that you may encounter when buying a home are conventional and government-backed loans. The main difference between these two loans can be found within their names. The conventional loans are typically backed by a bank, while government-backed loans are — you guessed it — backed by the government.
Once you have decided whether or not you want to choose a loan that’s backed by the bank or by the government, you’ll next have to decide whether you would prefer a fixed-rate mortgage or an adjustable rate mortgage, or ARM. As its name explains, a fixed rate mortgage is one which features an interest rate that stays constant throughout the mortgage’s term. Whether you choose a 5-, 10-, 15-, or 30-year fixed rate mortgage, the interest will stay the same no matter how the market changes. This kind of mortgage can be great for buyers investing in real estate during the current market, as mortgage rates are very low. This means that if you can lock in these rates for the duration of your mortgage, you can pay the same amount of principal and interest throughout.
For adjustable rate mortgages, the interest rates tend to fluctuate along with the market. When you first buy the home, the interest tends to stay fixed at a low rate for the first few years, however after that initial period it usually adjusts to the current interest rates, whatever they may be.
Now that you understand the basic difference between these common types of mortgages, you can make a more informed decision on what’s best for you when the time comes to choose a mortgage.