Mortgage Loan Types: The Pros and Cons of what to use

As a home buyer, you have probably been spending quite a bit of time trying to figure out what type of mortgage loan is best for you financial situation. There are several different types of mortgage products available, each with its own unique advantages and disadvantages. Thoroughly researching the different mortgage loan types that can help you make an informed financial decision.

The most common type of mortgage loan is the fixed rate mortgage. With this type of mortgage, your interest rate is locked for a certain period of time – some mortgages offer fixed rates for as little as three years, while others may provide the same rate for the duration of the loan.

The main advantage of a fixed rate mortgage is that you will know how much you will need to budget, with little variation. If you get a 30 year fixed mortgage at $1,500 per month, you can be sure that your mortgage payment will be close to this amount until you pay off the loan or sell the house. While taxes and insurance may vary a bit from year to year, your mortgage payment will usually not vary by more than about 10 percent.

The disadvantage of this type of loan is that if interest rates fall, you will be paying a higher rate than necessary. It is possible to refinance a fixed mortgage to obtain a lower interest rate, but keep in mind that you will be required to pay closing costs for the refinanced loan, so you will want to make sure that your interest savings will justify these costs.

Another popular mortgage product is the variable rate loan (sometimes called an adjustable rate mortgage). The interest rates for these loans vary from year to year, so your mortgage payment may fluctuate dramatically.

These loans are attractive to home buyers because they can often be obtained at lower interest rates than fixed loans. However, you need to be prepared for the uncertainty that comes with this type of loan, because if interest rates rise substantially, you may end up paying more each month than you would have with a comparable fixed mortgage loan.

The third common type of loan is the interest only loan. With this type of loan, you only make interest payments for a set amount of time, usually seven years, and your principal balance remains the same during this period. An interest only loan can be a good way to save money during your first years of home ownership, especially if you have unsteady income or you anticipate that property values in your area will continue to rise. However, if things don’t work out as planned, you may find yourself struggling to make your mortgage payments at the end of the interest only period. If this happens, you may need to refinance the mortgage or sell the home at a loss to avoid substantially higher payments.

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