Understanding the Different Types of Mortgage Loans

Understanding the Different Types of Mortgage Loans

Getting a house is an exciting time for anyone. It is yours, and that means you can do what you want, paint it the colors you wish, and decorate it how you desire. Before signing, it is important to understand the type of mortgage loan and how it differs from other options available.

There are three main options when it comes to this type of agreement: the fixed rate, adjustable rate, and interest only jumbo rate. For the most part, one of the first two types of payment arrangements is taken. Sometimes, those who are exceptionally well off and have a note of over $625,000 will negotiate for an interest only arrangement in which only the interest is paid for a set number of years. After that time, payments are made to the principle.

Fixed Rate

The interest on the note is fixed at a certain percentage, and it won’t go up over the life of a loan. It makes budgeting for the housing payment easy, as you know what the cost is going to be from month to month. Terms can be set as little as five years, but most run between 15 and 30 years as they are the most affordable.

If you utilize escrow to handle your insurance and property taxes, there may be a slight increase or decrease from year to year in the monthly payment. This variation has nothing to do with the actual terms of the mortgage loan. Instead, it has to do with taxes going up or down and insurance changes.

Adjustable Rate

An adjustable rate means that the interest will vary from year to year. Initially, many homebuyers take this type of mortgage loan because the rate is lower than a fixed rate. However, the rate will change over time. Usually, there is an initial rate that will stay the same anywhere from a few months to a few years.

The rate change is partly tied to an index. This is a way that rates are measured, and it can change several times throughout the year. The rate that is charged is based on this index; when the rate goes up so do the payments, and when it comes down, the payments may go down as well. Most adjustable rate providers will put a “cap” on the rate. This limits how high it can go. However, the “cap” can work in reverse and limit how low the interest rate can go as well.

Before taking an adjustable rate mortgage loan, you need to know how high the cap is, how frequently the rate will adjust, and if there are any limits to how low the interest can go. You also need to know how soon to expect the payments to go up and if you can comfortably afford the monthly note if it reaches its maximum.

Taking out a mortgage can be both exciting and nerve-wracking. By doing your research and having a clear budget, you can get the best loan for your budget.