When it comes time to buy your own home, you're probably quite
excited. After all, owning your own home does seem to be the
ultimate American Dream. With that home though, comes massive
financial responsibilities. In fact, the mortgage you get for your
home is likely to be the largest debt you'll ever have. But since most
of us can't just go out and buy a home with cash on hand, we must
take out mortgages instead. And the best thing you can do before
getting your home mortgage, is to know your options.
You see, there are many types of mortgages that can be gotten
when buying a home. And knowing some of the most common
types of mortgages will help you select the best one for your current
and future financial needs. So let's look at a few of these...
Mortgage Length - Most mortgages last for 30 years, but there are
shorter options ranging from as little as 10-15 years too. The longer
length mortgages are helpful in keeping your monthly payments
down, but often you'll find yourself paying twice as much money over
the entire length of the loan. By taking shorter mortgage options,
you increase your monthly payment amounts, yet you're paying less
overall.
Fixed Rate Mortgages - This type of mortgage will lock you in to one
interest rate for the length of your loan. This is helpful if you don't
want to have to worry about your mortgage payment fluctuating up
over the years, and it's great if you can get the mortgage when
interest rates are quite low.
On the downside though, you're locked in to that interest rate
regardless. So even if interest rates drop drastically, you're still
stuck with the one you agreed to when you first got that mortgage.
Adjustable Rate Mortgages - These are often referred to as ARMs,
and they're the opposite of fixed rate mortgages. As the interest
rates fluctuate up and down, so too will your mortgage interest rates
- and your monthly mortgage payments.
It's not uncommon for Adjustable Rate Mortgages to have a short
period at the beginning where you're rates are fixed though. This
can be for as little as 10 months or as long as 10 years, and that's
helpful because you'll have a set monthly payment for at least a little
while at the beginning.
Adjustable rate mortgages which have 5 or more years of fixed
rates in the beginning are also referred to as hybrid ARMs.
Most ARMs can also have an interest rate cap. There are multiple
options here too, including a Periodic rate cap which limits how
much your interest rates can change at any one time; a Lifetime rate
cap which limits how much your interest rates can rise over the
entire length of your mortgage loan; and a Payment cap. Payment
caps are a bit more rare, but they allow you to limit how much your
monthly payment amount can rise over the entire length of your
mortgage loan.
Sub Prime Mortgages - These mortgages are specifically for
people with credit problems. Generally if you've been late enough
on your bills, or you've had other credit problems which caused your
credit score to drop below 620, you'll need to look around for this
type of lender and mortgage.
Since you're considered a credit risk in this case, you'll find these
types of mortgage loans tend to have higher interest rates than
conventional mortgages do. On the upside though, you'll also find a
much wider difference in rates from one lender to another, because
they each use their own risk criteria. So just by shopping around
with many lenders, you could find yourself getting a great rate
regardless of the dings on your credit record.
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