If you’re unprepared, buying a home can be a dangerous venture. If you aren’t well informed, not understanding your options could wind up costing you thousands, or tens of thousands, of added dollars. Aside from choosing the house itself, is the type of mortgage you’ll choose and the length of your loan.
Fixed vs. Adjustable
Fixed rate and adjustable rate are the two categories almost all mortgages fall into. For a fixed rate, the interest rate is locked in by you, the homebuyer, during the buying process with your lender. Regardless of your mortgage term, this means the amount you’ll pay in the first year of your loan will be the same as the last year of your loan.
With a fixed-term mortgage the only variables that can alter your monthly payment are whether you’ll owe private mortgage insurance for putting less than 20% down on your home and your property taxes, and possibly homeowners insurance if these have been added to your total loan.
An adjustable-rate mortgage is referred to as an ARM. ARMs usually have an enticingly low interest rate that’s below some of the most popular fixed-rate mortgage options. This lower rate lasts for a selected period, usually three to seven years, then your loan “adjusts” to alterations in mortgage rates during the period where your interest rate was below market. If mortgage rates have increased substantially during this period, homebuyers with an ARM could also see changes in their property taxes and insurance, which of course affect the monthly payout. The best advantage to an ARM is if you intend to pay off your loan quickly, during the low rate years.
The following options assume a fixed-rate mortgage, so let’s take a closer look at the trade-off between the four most popular mortgage terms: 10-, 15-, 30-, and 40-year.
10-year mortgage: For those who can put a large down payment on a home a 10-year mortgage may be ideal. Lenders are usually willing to offer significantly lower interest rates for 10-year mortgages since there’s less time risk to the lender. The downside of a 10-year mortgage is that your monthly payment will usually be much higher. Of course, the real advantage is that your total loan cost will be the lowest with a 10-year mortgage.
15-year mortgage: Next to the traditional 30-year loan a 15-year mortgage is the second-most popular mortgage term in America. A 15-year offers a notably lower interest rate than a 30-year, but at the same time you can also expect higher monthly payments as a homeowner than a conventional 30-year loan.
30-year mortgage: The most popular loan option for purchasing a home in the US is the 30-year mortgage. For homebuyers who plan to stay in their home for a long time, the 30-year mortgage tends to be a good option. It’s viewed as one of the least risky options for lenders but having the convenience of stretching your payment out over 30 years means you as the homeowner will pay more in interest over the life of the loan.
40-year mortgage: A 40-year mortgage may offer benefits for certain types of homebuyers, though they are not common. It can be helpful to homebuyers looking to purchase a pricey home while keeping their monthly payment low. The drawback is it often bears the highest interest rate of these four options, and is the costliest loan when interest is included.
Keep the size of your loan in mind when deciding on term length. While there’s no concrete number here, a home loan of under $100,000 can result in a higher interest rate since the lender wants to ensure that creating a small loan still nets it a profit. Alternatively, a jumbo loan, a mortgage of $417,000 or higher, usually results in a slightly higher interest rate since a lender is taking on a bigger risk by lending out so much of its capital.
Only you can choose the option that best fits your financial situation, but now you should have a better understanding as you head into the loan process.
First Florida Mortgage Can Help
At First Florida Mortgage, we are a Florida-based mortgage company. We want to help you through every step of financing your new home. Fill out the quick contact form or call First Florida Mortgage today at 1-800-501-2131 to speak with one of our Florida mortgage specialists and get a free good faith estimate.