Borrowing money to buy a new home can be an intimidating process. There are several options and each of them comes with different benefits. But to choose the right option you don’t need to become an expert. You can plan all of it and take one step at a time.

Basics of Mortgages

The first thing you should ask yourself when buying a mortgage is whether you want a Fixed rate mortgage or Adjustable rate mortgage. These two plans are not much different from each other.

  • Both of these plans allow you to borrow a handsome amount of money which you can pay back in the form of monthly payments.
  • Under both these plans your first year payments are shifted towards the payment of interest amount and then by the time the equity on your home grows faster.
  • Both these types require you to disclose your credit history in the form of debt payment, income, monthly expenditures etc.

Fixed Rate Mortgage

Fixed rate mortgage plans are more suitable for most of the clients. They consist on long term i.e. 30 years plan but you can also get 10 or 15 years plan. In this plan the interest rate remains the same over the term of the mortgage. So if you were paying 4% interest rate at the beginning of the mortgage you’ll keep paying 4 till the end. The benefit of this plan is that the interest rate will not rise even if they are going up.

Adjustable Rate Mortgage

In Adjustable rate mortgage plan, the interest rate change over the term of the mortgage. It starts from an interest rate which is lower than the market rate of that time and then sets back to regular rate after some time. So the amount of monthly payment also changes with that.

ARM plan also consist of 30-years plan or so, however, the rules for this plan are incorporated in your contract. So read it carefully before you sign the mortgage papers.

Adjustable rate mortgage plans can be complex because the amount of monthly payment keeps changing over the term of the mortgage. There may be chances that you monthly payment shrinks after few years because the mortgage rates will fall. But in times of high interest rate you have to pay huge monthly payments.

Therefore it is important to consider all points before choosing any one plan. Many, many homeowners lost their homes in the housing crash because they were stuck with a wrong mortgage plan.

 

 

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