Getting a home is an exciting time for anyone. It’s yours, and that means you can do whatever you want, paint it any colors you want, and decorate it however you want. Before you sign, it’s important to understand the type of home loan and how it differs from other available options.
There are three main options when it comes to this type of agreement: the fixed rate, the adjustable rate, and the interest-only jumbo rate. For the most part, one of the first two types of payment arrangements is taken. Sometimes those who are exceptionally wealthy and have a note of more than $625,000 will negotiate an interest-only agreement where interest is only paid for a set number of years. After that time, payments are made at the beginning.
fixed interest rate
The interest on the note is fixed at a certain percentage and will not increase over the life of a loan. It facilitates the budget for the payment of the house, since you know what the cost will be from month to month. Terms can be set to as little as five years, but most are between 15 and 30 years as they are the most affordable.
If you use escrow to handle your insurance and property taxes, there may be a slight increase or decrease in your monthly payment from year to year. This variation has nothing to do with the actual terms of the mortgage loan. Instead, it has to do with taxes going up or down and changes in insurance.
Adjustable Rate
An adjustable rate means that interest will vary from year to year. Initially, many homebuyers take this type of home loan because the rate is lower than a fixed rate. However, the rate will change over time. Usually, there is an initial rate that will stay the same from a few months to a few years.
The rate change is partially linked to an index. This is one way that rates are measured and can change several times during the year. The fee charged is based on this index; when the rate goes up, so do the payments, and when it goes down, the payments can go down too. Most adjustable rate providers will put a “cap” on the rate. This limits how high you can go. However, the “cap” can work in reverse and also limit how low the interest rate can be.
Before you take out an adjustable-rate home loan, you need to know how high the cap is, how often the rate will adjust, and if there are limits to how low the interest can go. You also need to know how soon you expect your payments to increase and whether you can comfortably pay the monthly note if it reaches its maximum.
Obtaining a mortgage can be exciting and nerve-wracking. By doing your research and having a clear budget, you can get the best loan for your budget.