“Mortgages for your primary residence or for a vacation home or for an investment property in the South Padre Island area can vary greatly from interest rate to down payment to terms to lender guidelines.” –House Logic
There are two types of mortgages; fixed or adjustable. Research and ask some experts to find out the right on for you.
It is advised that you learn and fully understand your mortgage financing options and choose the loan that best fits your income and ability to tolerate risk.
The basics of mortgage financing
- The most important features of your mortgage loan are its term and interest rate.
Normally, mortgages come in 15, 20, 30 or 40 years duration. The longer the term you choose, the lower your monthly payment will be. On the other hand, you should also know that the longer the payment terms, the higher interest you’ll have to pay.
- Mortgage interest rates generally come in two flavors: fixed and adjustable.
If you are risk-averse, on a fixed income or you want to take advantage of low-interest rates, the fixed-rate type is recommended. This allows you to lock in your interest rate for the entire span of your mortgage term.
- The risks and rewards of ARMs
Adjustable-Rate Mortgage (ARM) is the type of mortgage wherein the interest rate adjusts at a future date listed in the loan documents. It goes up and down depending on a particular financial market index like Treasury bills. Example: A 3/1 ARM will have the same interest rate for the first three years and will adjust annually after that. A 5/1 ARM, the same as 3/1 ARM, will have the same unchanged interest rate until the five-year mark. Typically, ARMs include a cap on how much the interest rate can increase, such as 3% at each adjustment, or 5% over the life of the loan.
Why do people agree to such kind of terms? It’s because ARMs can be beneficial if you expect your income to grow significantly in the coming years. The interest rate on some—but not all—ARMs can even drop if the benchmark to which they’re tied also dips. ARMs also allow you save money because of its lower interest rate on its first few years compared to fixed-rate mortgages.
But if rates go up, your ARM payment will jump dramatically, so before you choose an ARM, answer these questions:
- How much can my monthly payments increase at each adjustment?
- How soon and how often can increases occur?
- Can I afford the maximum increase permitted?
- Do I expect my income to increase or decrease?
- Am I paying down my loan balance each month, or is it staying the same or even increasing?
- Do I plan to own the home for longer than the initial low-interest-rate period, or do I plan to sell before the rate adjusts?
- Will I have to pay a penalty if I refinance into a lower-rate mortgage or sell my house?
- What’s my goal in buying this property? Am I considering a riskier mortgage to buy a more expensive house than I can realistically afford?
- Consider a government-backed mortgage loan
Consider a government-backed loan from the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) if you have not saved enough to complete the ideal 20% down payment, or if you have a low credit score and you can’t qualify for a fixed-rate or ARM with a conventional lender.
FHA offers fixed-rate and adjustable loans with reduced interest rates, low down payment (as low as 3.5% while VA offers no down payment loans. You can also use cash gifts from your family members.
Always remember that any mortgage, the slight variations in interest rates, loan amounts, and terms can significantly affect your monthly payment.