What Type Of Mortgage Is Best For You?
Mortgages are one of the most important aspects of buying a home. There are several different types of mortgages that home buyers can choose between. The different types of mortgages vary in length, terms, rates, and many other factors.
“What type of mortgage is best for me,” is one of the top mortgage FAQs that is asked by buyers. It’s important when buying a home, you understand what type of mortgages are available and also determine which is the best fit for your situation.
Below are some of the most common types of mortgages as well as some insight into the PROs and CONs of each type of mortgage. Read on to find out the various types of mortgages and also to help you decide which is best.
30 Year Fixed Mortgage
A 30 year fixed mortgage is one of the most popular types of mortgages. A 30 year fixed mortgage is a loan that has a fixed interest rate for the entire duration of the loan. Below are the PROs and CONs of 30 year fixed mortgages.
PROs Of 30 Year Fixed Mortgages
One of the biggest reasons why 30 year fixed mortgages are so popular and one of the advantages of them is the fact that the payment is affordable when comparing to a shorter termed mortgage, that won’t change over the life of the loan.
Another advantage of 30 year fixed mortgages is that they can be obtained with small down payment percentage. For example, a 30 year FHA mortgage can be obtained with a minimal 3.5% down payment, which is why it’s one of the most popular ways to buy a home with very little money.
CONs Of 30 Year Fixed Mortgages
The biggest drawback of 30 year fixed mortgages is the length you will pay interest on the mortgage. Since mortgages are considerably large amounts of money being loaned, paying 4.5% interest for an additional 15 years on thousands of dollars is a substantial amount of interest.
Another negative of 30 year fixed mortgages is that the interest rates are typically higher than shorter termed mortgages. The reason 30 year fixed mortgage rates are higher than a 15 year mortgage is because the length of the loan is much longer which ultimately means more risk for the lender. A mortgage lender is able to take on the additional risk by charging a higher interest rate.
Popular 30 Year Fixed Mortgage Products
There are several different 30 year fixed mortgage products that home buyers can choose from. One of the most common 30 year fixed mortgage product is an FHA loan. FHA, which stands for Federal Housing Administration, allows a buyer to only put 3.5% down. The low down payment percentage plus the opportunity a buyer has to request up to 6% of the purchase price in the form of a seller concession make it an extremely popular 30 year fixed mortgage product.
Other popular 30 year fixed mortgage products include Veterans Administration Loans (VA Loans), United States Department of Agriculture (USDA Loans), Fannie Mae, and Freddie Mac mortgage products.
15 Year Fixed Mortgage
A 15 year fixed mortgage is another popular type of mortgage. A 15 year fixed mortgage is similar to a 30 year fixed mortgage in the fact that the interest rate is fixed for the duration of the mortgage. Below are some of the most common PROs and CONs of 15 year fixed mortgages.
PROs Of 15 Year Fixed Mortgages
Not all buyers are able to qualify for a 15 year mortgage, however if able, there are several benefits of a 15 year fixed mortgage. One of the biggest advantages of a 15 year fixed mortgage is the reality that the loan is paid off quicker than a longer termed mortgage.
Another PRO of obtaining a 15 year fixed mortgage is there is a lot less interest than a longer termed mortgage. Again, since many mortgages are such a large amount of money, obtaining a 15 year mortgage can save a buyer hundreds of thousands of dollars when comparing to the interest paid on a 30 year mortgage.
15 year fixed mortgages have less interest paid not only because of the length of the mortgage but also because the rates for a 15 year fixed mortgage is traditionally lower than longer termed mortgages. This is obviously another huge benefit of 15 year fixed mortgages.
Due to the fact that there is less interest and less time to pay the loan back, this allows buyers who are able to obtain a 15 year mortgage the ability to save for retirement, the ability to buy a vacation home, or save for unexpected expenses.
CONs Of 15 Year Fixed Mortgages
One CON of getting a 15 year mortgage are the higher monthly payments when comparing to a mortgage with a longer term. Since a 15 year mortgage is paid back in half the time when comparing to a 30 year fixed mortgage, the monthly payments have to be higher to cover the difference in time.
Another drawback of 15 year fixed mortgages that many buyers don’t realize is the amount of home they qualify for. Since the monthly mortgage payment is higher due to the shorter term, a buyer who is obtaining a 15 year fixed mortgage will qualify for less than a buyer who is getting a mortgage with a longer term.
Popular 15 Year Fixed Mortgage Products
Many of the popular 15 year fixed mortgage products are the same as 30 year fixed mortgage products. The two biggest differences between the two are the interest rates and also the length of the mortgage.
Adjustable Rate Mortgages (ARMs)
Another type of mortgage that buyers have the ability to choose from are adjustable rate mortgages, frequently referred to as ARMs. An ARM is a mortgage that will have an adjusting rate at a specified time and frequency. An ARM rate is traditionally lower than fixed rate mortgages during the specified time but will adjust with market trends. Below are several types of adjustable rate mortgages as well as the PROs and CONs of adjustable rate mortgages.
Types Of Adjustable Rate Mortgages (ARMs)
- Hybrid ARMs – A hybrid ARM is a mix between a fixed rate mortgage and an adjustable rate mortgage. This type of mortgage will have a specified amount of time in the beginning of the term where the mortgage rate is fixed and once that time has elapsed, the rate will begin to adjust. For example, a 5/1 Hybrid ARM will begin with 5 years of a fixed rate followed by the rate adjusting on an annual basis according to an index plus a margin.
- Interest Only ARMs – An ARM with an interest only period allows a buyer to pay only interest for a certain number of years. This means a buyer will not pay anything towards the principal mortgage balance. For example, a 5/1 Interest Only ARM would begin with 5 years of payments going towards the interest and once the 5 years elapsed, it would readjust annually from that point forward.
PROs Of Adjustable Rate Mortgages (ARMs)
One of the most common reasons why ARMs are attractive to some buyers is due to the initial rate that an ARM has. An ARM is a popular option for a buyer who thinks they will be making a move within a handful of years after purchasing the home. If a buyer only plans on staying in a home for 5 years and can take advantage of a 5/1 ARM that offers an interest rate that is 1% lower than a fixed rate mortgage it would be to their benefit to obtain an ARM.
Another PRO of adjustable rate mortgages is that once the rate begins to adjust and is lower than it was when a buyer purchases the home, they will be able to take advantage of the lower rate. A buyer who obtains a fixed rate mortgage cannot take advantage of a lower rate unless they go through the refinance process.
CONs Of Adjustable Rate Mortgages (ARMs)
While it’s possible that an adjusted rates can be lower than the initial rate of an ARM which is a benefit, it also can be the opposite. One of the biggest negatives to adjustable rate mortgages is the chance that the interest rate can significantly increase when comparing to the initial rate of the ARM. An increase in the mortgage rate can create financial stress on a buyer and also can make it extremely difficult to budget and plan for the future.
Another drawback to some adjustable rate mortgages are the pre-payment penalties that some have. If you’re planning on buying a home with an ARM, it’s important to find out whether or not there are pre-payment penalties for the specific ARM you’ll be obtaining.
Balloon Payment Mortgages
Another type of mortgage that some buyers will consider are balloon payment mortgages. A balloon mortgage begins with normal monthly payments for a specified amount of time and at the completion of the specified time, the remaining balance of the loan is due. The payment when the remaining balance of the loan is due is referred to as a balloon which can be a large payment, depending on the mortgage amount. Below you will find out what the PROs and CONs are of balloon payment mortgages.
PROs Of Balloon Payment Mortgages
One reason why some buyers will take advantage of balloon payment mortgages is because the interest rates are typically low. In many cases, balloon payment mortgage rates are lower than fixed rate mortgages and also adjustable rate mortgages. Balloon payment mortgages are a good option for a buyer who plans on staying in a home for a short period of time if the plan is to sell before the balloon payment is due.
CONs Of Balloon Payment Mortgages
The biggest drawback of balloon payment mortgages is the risk that is associated with the mortgage. Once a balloon payment is due, a buyer will likely have to refinance in order to cover the balloon payment. This can be a huge problem if a homes value actually decreases over the specified period of time in the beginning of the balloon mortgage.
Since most lenders will want to see 20% equity in a home before they consider a refinance, a home that has decreased in value may not have that amount of equity which can make it difficult to refinance. Generally speaking, a buyer who obtains a balloon payment mortgage is at a greater risk for foreclosure than a buyer who obtains a fixed rate mortgage.
General Mortgage Tips & Advice
As you can see there are many different types of mortgages to choose between. Now that you have an understanding of the different types of mortgages listed above, it’s important that you know what tips to follow when getting a mortgage. Below are some of the best general mortgage tips and advice to follow.
Shop Local Lenders
It’s very important when buying a home you not only know how to interview real estate agents, but also know what to look for in a lender. It’s highly recommended that you shop around with a few different local lenders to ensure you’re receiving the best mortgage product for your situation as well as the best rate.
Some lenders cannot offer certain products that others can. For example, there are a few mortgage lenders in Rochester NY that offer a program for first time home buyers in Rochester NY that some lenders do not offer. By not shopping around with a few local lenders you potentially could be missing out on a mortgage product that is a way better fit than any of the others.
Get Pre-Approved Before Shopping For Homes
One of the biggest mistake that buyers make is not getting a pre-approval before shopping for a home. Regardless of the type of mortgage you will be obtaining, it’s critical to get pre-approved before shopping for homes.
There are many reasons to get a pre-approval before looking at homes. One of the most important reasons is to ensure you’re looking at homes that fit within your budget. It makes zero sense for a buyer to look at a home that is listed for $350,000 if they can only afford up to a $250,000 mortgage.
Don’t Do Anything Crazy With Your Finances
Once a mortgage pre-approval is received, it’s very important that a buyer doesn’t do anything crazy with their finances. There are several reasons why a mortgage can be denied after a pre-approval is issued. A buyer who goes out and buys a shiny new car can potentially be costing themselves the home they’ve been pre-approved for.
Knowing what type of mortgage is the best fit for you is very important when buying a home. As you can see, there are several different types of mortgages a buyer can choose between and each mortgage product has their positives and negatives.
To fully understand what type of mortgage is best for you, it’s highly recommended that you discuss with a top mortgage lender in your local area. If you’re not sure who the top mortgage lenders are in your area, ask a top local Realtor® who they would suggest for home financing.
Other Top Mortgage Articles & Resources
- How To Avoid Overpaying For A Mortgage via Maximum Real Estate Exposure
- What Is The Difference Between A Pre-Approval and A Pre-Qualification?
- Top Articles Regarding Mortgages & Home Financing via Bundlr
Are you wondering how to get a mortgage in Rochester NY or what mortgage is the best for your Rochester NY home purchase, the above information will be extremely helpful. If you’re not working with a top Realtor® in Rochester, NY, contact me, I’d love to help you determine which type of mortgage is best for you and also help you find the perfect home!
About the authors: The above article “How To Determine What Type Of Mortgage Is Best For Me” was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.
© 2016, Kyle Hiscock. All rights reserved.