As you begin your search for the perfect home in Emory Glen, you are probably thinking about your mortgage options. Mortgages come in various types, each offering different terms and conditions. Which type you should choose depends on a number of factors. A lender can help you navigate your options. Here are three mortgage types to consider:
The most common and most popular home loan is a fixed-rate mortgage. This is a type of home loan where the interest rate remains the same for the entire term of the loan. This means that your monthly principal and interest payments remain the same throughout the life of your mortgage. These mortgages are good if you plan to stay in your home for an extended period and if you want to avoid potential fluctuations in their monthly payments due to changes in interest rates.
There are pros and cons to fixed-rate mortgages.
Pros
Stability. With a fixed-rate mortgage, the interest rate remains constant throughout the life of the loan, providing predictability in monthly payments.
Protection against interest rate hikes. You are shielded from increases in interest rates, which can lead to higher monthly payments.
Easier budgeting. Since the monthly payment remains the same, it’s easier for you to budget and plan your finances.
Cons
Higher initial rates. Fixed-rate mortgages often have slightly higher initial interest rates compared to ARMs.
Less flexibility. You may miss out on potential savings if interest rates decrease in the future, as you would need to refinance to take advantage of lower rates. In that case you would have to pay closing costs.
If you believe interest rates will remain stable or decline in the future, you may be interested in an adjustable-rate mortgage (ARM). Also known as a variable-rate mortgage, this is a type of home loan where the interest rate fluctuates over the life of the loan based on changes in a specified financial index. That means your monthly payments can increase or decrease depending on changes in the index.
Pros
Lower initial rates. ARMs typically start with lower interest rates compared to fixed-rate mortgages, which can result in lower initial monthly payments.
Potential for savings. If interest rates decrease over time, you could benefit from lower monthly payments without needing to refinance.
Flexibility. Some ARMs offer initial fixed-rate periods, providing you with a fixed interest rate for a certain period before adjustments begin.
Cons
Uncertainty. Interest rates on ARMs can fluctuate after the initial fixed-rate period, leading to uncertainty about future monthly payments.
Risk of payment increases. If interest rates rise, monthly payments on ARMs can increase significantly, potentially causing financial strain.
Complexity. ARMs can be more complex than fixed-rate mortgages, with terms such as adjustment caps, index rates, and margin rates that you need to understand.
Also known as hybrid adjustable-rate mortgages, these loans combine features of both fixed-rate and adjustable-rate mortgages. There is an initial fixed-rate period, during which the interest rate remains constant, followed by a period where the interest rate adjusts periodically based on market conditions.
Pros
Lower Initial Interest Rate. Hybrid ARMs often offer lower initial interest rates compared to traditional fixed-rate mortgages. This can result in lower initial monthly payments during the fixed-rate period, providing you with potential savings.
Initial Rate Stability. During the fixed-rate period, you will benefit from the stability of knowing that your interest rate and monthly payments will remain constant.
Potential for Rate Decrease. If market interest rates decrease after the initial fixed-rate period, you may benefit from lower interest rates and monthly payments when the adjustable-rate period begins.
Flexibility. Hybrid ARMs offer you flexibility in terms of choosing a loan that suits your needs.
Cons
Risk of Rate Increase. Once the initial fixed-rate period ends, the interest rate on a hybrid ARM will adjust periodically based on market conditions. If interest rates rise, you may experience higher monthly payments.
Uncertainty. You must be prepared for potential fluctuations in your mortgage payments based on changes in interest rates.
Refinancing Costs. If you plan to refinance or sell your home before the end of the initial fixed-rate period, you may incur refinancing costs or prepayment penalties.
Complexity. Hybrid ARMs can be more complex than traditional fixed-rate mortgages, as you need to understand not only the initial fixed-rate period but also how the adjustable-rate period works, including factors such as adjustment caps, index rates, and margin rates.
Many builders have preferred lenders who can help explain in further detail the different types of mortgages and their risks and benefits. Visit our model homes to learn more.