Knowing the answers can save you from getting the wrong loan.
Before borrowing money, it is important to know what loan options you have. This is especially true when you are filming mortgage loan… This is because you are engaged in a huge amount of money, and it will take a very long time to free yourself from this debt.
To ensure that you are truly ready to purchase, make sure you know the answers to these questions.
Start your path to financial success with a bang
Get free access to select products we use to help us meet our financial goals. These fully proven options can be the solution to help boost your credit score, invest more profitably, create an emergency fund, and more.
By submitting your email address, you agree that we will send you monetary tips along with products and services that we believe may be of interest to you. You can unsubscribe at any time. Please read our Privacy statement and Terms and Conditions…
1. What is the difference between a fixed and variable rate mortgage?
When you buy a loan, you will need to decide if you want a fixed rate loan or adjustable rate mortgage (ARM).
WITH fixed rate mortgage, your interest rate does not change at all during the repayment period. Your payments will not change, nor will the total cost of the loan. You know exactly what costs you are counting on and you can be sure that you can cover them.
On the other hand, variable rate loans can be adjusted after the expiration of the initial starting rate, which can happen just a few years after you have taken out the loan. For example, if you take 5/1 ARMthen you will only receive your starting rate for the first five years, and then it can be adjusted once a year.
ARM can seem attractive when you see interest rates versus fixed rate alternatives. This is because ARMs generally have lower starting rates than their fixed rate counterparts. But the main thing to know is that this is only the initial bet.
The rates are adjusted using a financial index. And, unfortunately, there is a good chance that they will be able to rise. This can lead to an increase in monthly payments and an increase in the total cost of the loan, which can be a huge financial burden.
This doesn’t mean ARM never makes sense. If you are getting a great rate and plan to refinance or sell before it starts adjusting, this is a good option. But you need to understand that you are taking on a much greater risk with this type of loan, and make sure you know the difference before you decide to take out a loan this way.
2. What is PMI and do I have to pay for it?
PMI means private mortgage insurance… You may have to pay it unless you make a down payment of at least 20% of the value of your home. So if you buy a $ 300,000 home and have a down payment of less than $ 60,000, you will most likely need a PMI.
PMI is usually a percentage of your loan, such as 1% or 1.5%. It is often billed as part of your monthly bill. And even though you cover all the costs, it doesn’t protect you. You must buy it so that your lender does not lose money if you stop making payments and he has to foreclose your home.
If you decide now it is good time to buy a house but you can’t make the down payment on the house, you might decide that paying the PMI is worth it. But it’s still a good idea to know what you are paying for and how much it costs before getting a mortgage that requires it.
3. How does the maturity of the loan affect the overall expenses?
Make sure you understand the relationship between loan maturity and total cost.
Many people choose a 30 year loan just because it is the most common and familiar. But you have a choice of many different repayment terms, including 15-year, 20-year and 30-year loans.
If you opt for the shorter mortgage maturity option, you will have much higher monthly payments. But your interest costs will be much lower over time. This is because you are likely to pay interest at a lower rate. and because you won’t pay interest for that long.
The table below shows how much it will cost you every $ 100,000 in mortgage debt under various payment terms, depending on average mortgage rates as of June 4, 2021:
To help you make informed decisions, use mortgage calculator and see what numbers you get. Picking up big bucks on a high monthly payment isn’t easy, but the benefit is that over time, you won’t be paying nearly as much money for your home. Ultimately, you need to understand the relationship between loan maturity and repayment costs and make the decision that is right for you.
Once you answer these three questions, you can decide which type of loan is best for your situation. You can borrow with your eyes open and hopefully pay off your mortgage while enjoying your new home.