Since, for most people, their house, represents their single, largest, financial asset, it makes sense, for potential homeowners, to become as knowledgable, as possible, in terms of their options, regarding financing, and purchasing their homes. The vast majority of Americans take advantage of using a mortgage, but, few, fully consider, realize, and recognize, their options, and opting for the length of mortgage, which best serves, their needs, and personal situations. With that in mind, this article will attempt to briefly examine, consider, review and discuss, 5 options, and some of the potential, pros and cons, of each of these.
1. Traditional 30 – 40 year term: The vast majority of fixed mortgages, have a term of between 30 and 40 years. This is beneficial to most, because it usually offers a compromise between the rate of interest paid, and affordability of monthly payments. In addition, because most mortgages have no prepayment penalties, one can pay additional amounts, as is most beneficial, and, thus, reduce the length of the mortgage’s life. One should understand, however, is, when one uses this term, his total principal and interest payments, will be considerably greater than the amount borrowed. This is remedied, to a certain degree, because mortgage interest, within certain limits, is tax – deductible!
2. 15 – 20 years: Reducing the length of the term, normally creates a lower rate of interest, being charged. However, it also translates, to higher monthly payments, and lower, total payments.
3. 7 – 10 years fixed rate/ then adjustable rates/ term: Those who are intending to remain in their present home for a shorter period, often benefit from this type of mortgage. It provides lower rates, and, often, makes qualifying for a particular amount, easier to do. The drawback, potentially, is after the initial period, if one remains in the present home, their rate will change, according to pre – determined terms, or they will need to refinance.
4. 1 year – adjustable: These types of loans generally offer the lowest initial interest rates, but, also, the least predictability, for the future. Of course, if one can only qualify, presently, using this form, or, intends, to relocate, very soon, this might be the best way to proceed.
5. Balloon/ interest – only: There are sometimes interest – only loans available, for a specific period of time, and of course, since one is not paying down the principal, the monthly cost/ payment, will be lower. However, it should be realized, you are not paying – down, what you owe, and doing so, brings the risk of future undesirable ramifications/ results. In addition, these are usually referred to as balloon loans, because, at a specified period, the full amount of the principal of the loan, becomes due, and, one, must, either repay it, in full, or secure a new mortgage.
Based on one’s individual circumstances and needs, it becomes possible to determine, the best mortgage to secure. Remember, the more educated and knowledgable, you become, the better decisions/ choices, you will probably make!