Mortgages are often confusing for a first-time homebuyer, as there are many factors to consider. Among this is whether you’re supposed to get a home mortgage with a fixed rate — often called a "vanilla wafer" mortgage — or one with an adjustable or "floating" rate.
To help you get a better understanding of these two types of home mortgage, and perhaps lead you to a better decision that fits your budget and lifestyle, here is a short comparison:
A fixed rate home mortgage offers an interest rate that never changes — no matter what the homebuying market looks like — throughout the term of the loan. It’s a great option if the rates are low during the time you’re buying a house. It’s also the more advisable and sensible option if you have the money to shoulder a pricier loan (the price you pay for an interest rate that doesn’t move even when the market rises).
A first-time buyer would probably have an easier time discussing this type of loan because it’s fairly straightforward. If you’re the type who never waivers in budgeting monthly expenses, this is also the type of loan you may wish to consider.
An adjustable-rate mortgage (ARM) is the opposite of a fixed rate mortgage, in that the interest rate may vary depending on the prevailing market rates. Those who choose this type of loan find the lower initial cost attractive. Due to lower initial payments, an ARM can allow buyers to get a bigger and a more expensive house they wouldn’t be able to afford if they were to get a fixed rate.
That’s not the end of the story, though. An ARM’s interest rates may vary over time, so your payments may go from 2% to 12% interest over the course of the loan. On the other hand, if market rates fall, you don’t have to refinance to enjoy the lower payments.
Both of these types of mortgage carry with them some pros and cons. What is important is you determine which one fits your paying capacity for the duration of the loan, and only work with a reputable lender.
When you buy a home and make a down payment of less than 20%, a lender will require you to purchase PMI or private mortgage insurance. This is done to insure loss from a loan default provided to lenders by an insurance company. With PMI, you will need to pay a continuous monthly fee when you make your loan payment.
Value of PMI
Mortgage lenders in Lake Oswego note that PMI rates vary depending on different factors. Many who can’t afford a 20% down payment can now purchase their dream home, but have to carry the burden of PMI. Note that it doesn’t give you an extra home insurance coverage, it gives the bank or the lender insurance, in case you can’t fulfill your obligations of paying the monthly fees, explains an expert from Primarynw.com.
The good news is, you can cancel PMI if you owe 75% or 80% or less of the property’s value. Note that you are only required to pay for this insurance when the loan-to-value (LTV) ratio is bigger than lender’s or company’s maximum LTV threshold. LTV represents the ratio of the loan amount to the fair market value of the house. This is also inversely related to the down payment you make (with a 10% down payment, the LTV ratio is 90%).
The Role of LTV
The LTV ratio decreases if you pay down the balance over time or if the home value upsurges. You can request for PMI removal if you think that the LTV ratio is below the set threshold. Note that some lenders may also offer a single, up-front payment of PMI, although this is not common. The value, of course, will depend on the different factors such as your LTV ratio and credit score.
The best way to get rid of PMI is to make a 20% down payment. If this is not possible, it is a good idea to save up first. For homeowners who want to own a home with less money for down payment, consider PMI in the process of paying for a home loan. Once your LTV is lower than the maximum threshold, you can get it removed and save a significant amount.
A few decades ago, the majority of homebuyers got their loans through local banks or credit unions. But there are multiple financing options on the market today, and this can make things complicated for new buyers.
Mortgage brokers, in particular, are a popular alternative to banks. But does this choice actually make a difference? It’s important to understand the unique benefits offered by both channels.
According to the Altiusmortgage.com, mortgage brokers in Salt Lake City have one major selling point: to get the lowest rate possible for their clients, while making the process as easy and convenient as possible. Since they have access to a wide range of mortgage products, and negotiate volume discounts that they then pass on to you, it’s possible to get lower rates than anywhere else on the market.
The results you get depend greatly on the company you work with. An established broker with plenty of industry experience and contacts will be able to secure the best loans for their clients. Many will also give advice specific to your circumstances, such as qualifying with poor credit.
It’s almost always preferable to access the services of private lenders through a good broker. You get assistance in the application process, enjoy lower interest, and can be sure that the lender you get is trustworthy.
Despite the strong advantages offered by brokers, there are definitely some benefits to choosing a bank instead. A first-time homebuyer might be more comfortable working with the bank they already have an existing relationship with. Keeping all of your financial business in one place simplifies things greatly.
Banks will also regularly offer long-term clients discounts on their advertised rates, but you will have to handle the negotiations yourself. However, keep in mind that they can be quite strict with their requirements, and borrowers with poor credit histories may have a hard time.
Everyone who has a mortgage has their own way of counting down the months or even years until they finally pay off all they owe and own their home clear and free. But what if you can prepay your loan? Would you do it?
What is Mortgage Prepayment?
Majority of borrowers are intent on getting rid of their home loan that they pay additional money on top of their monthly mortgage payments. This is called mortgage prepayment, and it may aid in building home equity faster, save you thousands of dollars on interests, and may free you from mortgage debts sooner.
Should You Prepay Your Mortgage?
Prepaying your mortgage will take more than your good intentions. Time and discipline are both equally necessary. Some borrowers forego prepaying since the whole process takes too long for them. Some are not disciplined enough to save extra money each month that will go towards prepaying.
On the other hand, those who choose to prepay see the process as something that will help them settle their mortgage sooner so they do not have to worry about paying it off in the next several years. What it comes down to is figuring out what’s important — saving for today or saving for the future? However, there is no doubt that the biggest factor when deciding to prepay your mortgage is your personal financial goals and situation.
For this, you must evaluate your whole financial picture. Do you have life or health insurance coverage? Are you planning to fund your retirement plan if you have one? If there is something that you failed to cover, maybe you’ll be better off focusing on that first instead of making additional payments to your monthly mortgage dues. Once you have covered all the basics, you should then begin calculating the numbers and figuring out if you can afford to make prepayments.
It is important to note, however, that not all lenders will agree to prepayments. In some cases, you will likely encounter penalty fees for paying off your loan earlier than stated in your loan agreement, so check with your lender first so you know what your options are.