Buying a house with a mortgage is perhaps one of the biggest financial transactions you will be involved in. A mortgage lender or bank will usually finance 80% of your home’s cost, and you will pay back the amount with interest. To aid you in applying for a loan, you must also know the different types of mortgages and how they differ from one another. Here are the types of mortgages you can choose from.
In fixed-rate mortgages, the monthly interest payments remain unchanged for the life of your home loan. Most loans have a repayment length of up to 30 years. The key advantage of a fixed-rate mortgage is that it protects the borrower from significant increments with rising mortgage rates, whether in St Louis or in any other city. The downside is that you will not benefit from decreasing rates.
Interest rates vary with time in adjustable-rate mortgages (ARM) with changing market interest rates. ARMs have a fixed time, during which the initial rates remain unchanged; usually 1–10 years. After this period, the rates adjust according to pre-determined guidelines. ARMs are an attractive option since they initially offer low monthly payments. As such, borrowers can qualify for larger mortgages. With this mortgage, the borrower can benefit from falling interest rates. The downside, though, is paying higher monthly payments with increasing rates.
An interest-only mortgage gives you the choice of paying only interest for the initial years, usually 5–7, much like an ARM. After this period, you can refinance your home, start repaying your principal amount, or make one lump sum payout. It is an ideal option for first-time homeowners who can take advantage of lower monthly payments in their first years and buy a larger house later when they qualify for larger mortgages. The home value may not, however, increase as the owner expects within the initial years.
You need to consider your finances and shifting economic realities when selecting a mortgage. Be sure you can afford your monthly payments with the expectation of changing interest rates. Making an informed choice will help you avoid costly mistakes.