The Most Appropriate Loan Type

The Most Appropriate Loan Type

If you prefer lower monthly payments, you may choose 30-year fixed rate mortgages.  The downside, however, is the fact that it will take you a while to accumulate equity in your home.  This option is most advisable if only you intend to stay in your home for quite a number of years with a stable rate. 

If such is not the case for you, you may opt for a 15-year fixed rate mortgage instead.  Since the principal and interest are distributed to a 15-year period, you easily accumulate equity in your home.  However, the monthly rates are definitely higher since you cut the period to half.  This is most advisable if you have intentions of selling your home in a few years time while enjoying a stable rate. 

The disadvantage for any form of fixed rate mortgages is manifested if interest rates happen to go down after some time.  As soon as you agree to a certain rate at the start, no matter how much the interest rates decrease along the way, you will not be covered by that anymore and you will have to adhere to what has been agreed upon. 

Another type is called adjustable rate mortgages.  Interest rates here change periodically based on a stable index so monthly payments will either increase or decrease.  A 1-year adjustable rate mortgage, for example, causes adjustments in the interest rates annually. 

Common indices followed by adjustable rate mortgages include 1-year Treasury Notes, Federal Funds rate, and the National Cost of Funds Index.  There is usually a margin of one to two percentage points which are added up to the declared index rates. 

The rates may increase or decrease depending on the two caps that are normally included.  The first cap sets forth limitations on the adjustment during a certain period while the second one gives limitations all throughout the loan. 

The advantage with this type is that monthly payments go down with a decrease in the index.  However, payments are also going to be vulnerable whenever there is an increase.   You might then want to evaluate the current system and situation given these pros and cons before deciding which one to choose.

Moreover, if in case you do not want to be tied up with an adjustable rate mortgage until the end of your loan, you may opt to avail of a convertible loan.  This is actually an adjustable rate mortgage that can be changed to a fixed rate mortgage after a declared number of years.  However, you may need to pay for some costs when you do avail of this.

Another way of possibly shortening your mortgage is through the purchase of a balloon mortgage which may function either as a fixed rate mortgage or an adjustable rate mortgage during the initial years. 

After a certain period of time, a considerable amount of loan is left which you have to pay in bulk.  This is most ideal to those who have plans of selling the home after some years and use the money generated from the sales to pay off the remaining balance and finally be loan-free.

Indeed, there are several options for you in the market.  You only have to identify exactly what your financial situation really is and from there, choose the loan type that will not give you a hard time every month.  Also, an idea about the current condition of the loan industry will help since it will make you aware which loan type will be most advantageous given your financial capabilities. 

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