When you begin thinking about purchasing a home or refinancing a home loan it is easy to get bogged down in all the information circulating around the internet. The information can be difficult to decipher if you don’t have a clear understanding of mortgage types.
I am a big believer in paying off your home as soon as possible. I am actively working towards this goal myself. When you don’t have a mortgage on your home you can use that money to fund retirement and investment accounts, purchase rental property, etc.
Ok that said; let’s dig into the information on mortgages. There are two basic types of mortgages: fixed rate and adjustable rate mortgages. Let’s review each option.
The oldest and still most popular mortgage is the fixed rate mortgage. These mortgages feature a fixed interest rate and fixed monthly payments. These payments do not change over the years and are an excellent choice if you anticipate living in the home a long time.
An adjustable rate mortgage generally starts with a lower rate which rises after a designated period of time. The mortgage documents will outline interest rate adjustments, time periods between adjustments, and an interest rate cap.
Another type of adjustable rate mortgage is the interest-only mortgage. Like an adjustable rate mortgage, an interest-only mortgage experiences changes in interest rates after set intervals. Where they differ is that in this mortgage, your payments only pay interest charges. None of your payment goes towards your mortgage balance.
These adjustable rate and interest-only mortgages are not viable long-term options. That doesn’t mean they do not have their place in the marketplace. If you only plan to own the home a short period of time (5 years or less) one of these mortgages may work for you. A mortgage comparison calculator is a great online tool where you can compare these three mortgages.
Closing Comments
If you do plan on staying in your home for a long period of time and currently have an adjustable rate mortgage it may be a good idea to refinance into a fixed rate mortgage. A mortgage refinance calculator can help you as you compare refinance offers.
Finance News Today is a free resource website on personal finance. We offer a free mortgage comparison calculator and a free home mortgage refinance calculator to aid in your financial planning.