A Guide To Understanding Mortgage Loans

Buying a home should be considered an investment for you and your family. This type of loan allows you the benefits of owning a home and capitalizing on its interest. All they require is you to put up a small lump sum of money and pay a monthly payment until the purchase price is paid off in full.

Although this is a simple process, the ins and outs of establishing the right mortgage for you can be a long and winding road. Let’s start by showing you the different types of mortgage loans that are available for you to take advantage of. Try to match the best type with your lifestyle and future financial goals.

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Types of Mortgage Loans

Fixed-Rate Mortgage Loan

This type of loan is very simple for the buyer to understand. You are typically given the option of 10, 15, 20, or 30 years for the term of your loan. The interest rate is set at a fixed amount, which means it will not change throughout the life of the loan.

Most homeowners opt for this type of payment structure for their home loan. They know exactly how much they must pay every single month. There’s no guessing what the price will be as the rate is the same month after month.

Adjustable-Rate Mortgage Loan

This type of home loan is also referred to as ARM for short. An ARM has an interest rate that can change from year to year. This means that your monthly payment can change as well. It can go up or down according to the mortgage index that your mortgage lender uses. There will typically be a maximum interest rate that is agreed upon at the time of the loan issuance, which specifies the highest amount you will ever have to pay.

As part of ARMs, there are spin-offs known as hybrid ARMs. These work by promising a fixed interest rate for a set number of years, after which, the interest rate will fluctuate depending on the index used. These hybrid periods of interest rate freezes can be set for three, five, seven, or even tens years. You can visit this website to learn more about ARMs.

Interest-Only Mortgage Loan

While this may sound enticing, realize that you will have to eventually pay the principal. With this interest-only mortgage you can establish a set period at the start of the loan in which you will not be responsible for any principal payments on your home loan. These set periods are usually five, seven, or ten years. After that introductory period, payments will increase and be distributed to both interest and principal payments.

It’s important to realize that when your interest-only period is up, your loan payments will likely to significantly increased. Once the full payment period starts, the interest rate is usually set up with an ARM. This means that new interest rates can be established each year afterward. While these mortgages may be a great option for those who can’t afford an entire house payment, they can turn into expensive investments later down the road.

 

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