Based on the latest reports from the real estate sector, an estimated 6.5 million homes were sold last year across the United States. That figure is expected to soar to more than 7 million this year, and sales are expected to hold relatively steady during the years to come. In light of the lofty number of home sales analysts have forecast for the near future, it’s logical to assume that millions of people are going to be searching for home loans within the coming months. Since not all mortgage loans are quite the same, choosing the right one can be tricky.
Exploring the Basics of Mortgage Loans
If you’re among the millions of Americans who will soon be seeking a home loan, understanding some of your options could help equip you to make an informed decision on which type of mortgage loan would be best for you. Agencies like DollarBack Mortgage can help with ironing out the finer details and securing a loan. In the meantime, we’ll cover a couple of the basic options and their benefits and disadvantages to help you get started. Each type of mortgage loan has its strong suits, but there’s a good chance one will be better suited to your financial circumstances than the other.
Looking at the Two Main Types of Home Loans
Several types of home loans are available, but they’re generally grouped into two main categories: fixed- and adjustable-rate mortgages. The rate each one refers to is the interest rate. With a fixed-rate mortgage, you’ll be locked into the interest rate at the time you take out the loan. It’ll be the rate you pay throughout the term of the loan. With an adjustable-rate mortgage, your interest rate fluctuates based on the interest rate at any given time. How often the interest on an adjustable-rate mortgage varies is based on the loan and provider. It could change every month, a few times a year, every 3 years, or every 5 years.
What Are the Benefits of Each Type of Mortgage Loan?
As mentioned, each type of loan has its own set of benefits. With a fixed-rate mortgage, you’ll have the certainty and security of knowing exactly how much your monthly mortgage payments will be regardless of how the interest rates fluctuate. This could go a long way toward helping you plan your monthly budget. At the same time, this type of loan protects you against sudden upticks in interest rates. You can’t control how much those rates change from one month to the next, but you can control how little they impact you with a fixed-rate mortgage.
When it comes to an adjustable-rate mortgage, the main benefit would be taking advantage of those times when the interest rates drop significantly. Even a fraction of a point could make a significant difference in how much your mortgage payments will be each month as well as how much interest you’ll pay over the life of the loan. If the interest rates happen to drop drastically, you could continue to pay the same amount each month as you were before the downturn, and the extra would simply go toward reducing your principal. You might even pay off your home much earlier than expected, which would ultimately save you even more in interest once all is said and done.
What Are the Disadvantages of Those Home Loans?
You could say that the benefits of each type of home loan are essentially their downfalls as well. If you take out a fixed-rate mortgage when the interest rates are low, you might be able to save a great deal of money over the long term. Still, what happens when the interest rates drop even further? You won’t get to take advantage of the potential savings if you’re paying on a fixed-rate mortgage. Additionally, you’ll probably pay slightly higher interest rates on a fixed-rate mortgage overall because you’re basically paying for the certainty of knowing exactly how much your mortgage payments will be each month.
On the other hand, if you have an adjustable-rate mortgage, you might be able to enjoy the added savings of dropping interest rates, but you’ll also have to take the upticks as they come. That will leave you paying more each month. Those higher payments might place your family in a bind if you haven’t planned for them in advance. This is especially true if you’re on a tight budget to begin with.
Of course, with the prices of everything soaring these days, it’s not always possible to save extra money to put toward the monthly mortgage payments just in case the interest rates go up. On that note, if the interest rates happen to skyrocket at some point, you could end up paying thousands of dollars more over the course of the loan than you would’ve with a fixed-rate mortgage.
Which Type of Loan Is Best for Me?
Determining which loan might be best for you requires taking a look at all the factors involved. If you’re in the market for a new home, be sure to weigh your household income against your current monthly expenses. From there, consider your credit scores. Those will make a major difference in the interest rate you’re eligible for when you acquire your mortgage loan. You can reach out to financial counselors, lenders, and other experts to help you find out the extent to which your credit rating will affect the amount of interest you’ll ultimately pay.
Once you understand how much interest you might be paying, you can start looking for homes in your price range. Consider taking a closer look at how the interest rates have been fluctuating in recent years. If they’ve been fairly steady and you time your loan acquisition just right, you could certainly benefit from an adjustable-rate mortgage. Just keep in mind, you won’t be protected against fluctuations if the interest rates suddenly soar to new heights. In the event you need the ultimate certainty of knowing what your monthly mortgage payments will be in spite of any changes in interest rates, a fixed-rate mortgage would probably be the better option.
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