The vast majority of those who buy a residence, at least to some extent, use some type of financing vehicle or mortgage. These can fall into two basic categories, either a compliant or a non-compliant type. For the most part, this refers to the amount being financed and can differ a bit from time to time and from one geographic area to another location. Once you decide to obtain a mortgage and are qualified by the lender, you must determine which of the 3 basic types of mortgages you will opt for: 1) fixed; 2) adjustable; or 3) balloon.
one. Fixed mortgage: Also known as fixed term, the most popular term of these is the monthly payment of 360, or 30 years. However, they are also available in a variety of other lengths, including: 15 years; 20 years; 25 years; and 40 years, as well as other terms. Obviously, the advantage of this type of financing is that you are assured of the principal and interest components, every month, for the life of the loan, which is often reassuring because it provides a degree of peace of mind. Remember, however, that your property taxes and your other escrow items (such as insurance), as well as your utilities, etc., generally to vary, and often increase over time. To qualify for these, in addition to having the necessary credit score, etc., one must have the correct relationship between income and monthly payments, etc. Since, at certain times, especially when interest rates are higher than the current ones, this ratio becomes a challenge for many potential home buyers, etc.
two. Adjustable – rate: When interest rates are higher, they usually come with a lower introductory rate, which means lower payments. Loans are also known as RMA, and that rate is guaranteed for a specific period of time, and then it changes. The new rate is usually based on some sort of index, such as SALARY READJUSTMENT, or types of Treasury bills, etc. For example, if you had a 30-year/5-year rate, that would mean the rate was guaranteed for 5 years, and then the index would dictate the new rate, after that. There may or may not be a limit, which would mean a limit on how much it could increase or decrease. Obviously, the advantage of this is the considerably lower rate, sometimes, for the initial period, as well as locking in the financing for a longer period (albeit at a different rate). This could allow someone with lower income to qualify for a larger mortgage, because the ratio of their monthly income to mortgage payment could be more favorable to the borrower. The downside is that at the end of the initial term, there is the risk of a rate increase or the need to try to refinance.
3. Balloon: These types of mortgages are offered less frequently. They carry interest, only payments during a specific period, or significantly lower payments during that introductory period. At the end of the period, the borrower must pay the loan in full or refinance. It’s pretty obvious what the positive and negative possibilities are!
The more a potential buyer knows, the better off they are. Hopefully, this brief discussion could increase the buyer’s comfort, safety, and ability to make the best decision for them.