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What Type of Home Mortgage is Best for You?

Nov 18, 2019, 09:24 AM
What Type of Home Mortgage is Best for You?

The term ‘mortgage’ is used pretty ubiquitously to refer to any loan for real estate. If you’re a first-time house buyer, you may not realize that the term is in fact rather general and describes a range of different categories of mortgage loan. Heading to a lender without knowing the difference between these various types of loans can result in you making the wrong decision, or just getting very confused. Read on  to learn the different types of home mortgage loans so you can keep up with all the jargon. And at the end, we’ll recap and help you find the best type of loan for you!

 

What Type of Home Mortgage is Best for You?

Fixed Rate Mortgage

In a fixed rate mortgage, the interest rate is locked and remains the same for the entire duration of the loan. If you’re paying 5% when you take out the loan, your rate will be the same for the entire term of the loan and you’ll still be paying 5% when you make your last payment. Fixed rate mortgage loans are the most common and most attractive to many people because the biggest part of your payment (principal and interest) doesn’t change.  And, when fixed mortgage rates are low, it can be very advantageous to lock in at a low rate for 15, 20, or even 30 years.

 

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage (ARM) is one where your interest rate is based on a national interest rate benchmark.  Usually, ARM rates are lower than fixed mortgage rates at the time you get your loan.  But, as the name implies, your rate may not stay that way.  Most ARM loan rates are fixed for a period of time (two to seven years), but can go up after that.  ARM loans are most attractive to people who know they won’t be staying in the house long-term. For example, perhaps my company is moving me to a new city, but I will only be there for three years.  In that case, an ARM loan is a great option because I will pay less interest with an ARM, and I don’t need the rate security of a 30 year fixed rate loan.  An ARM loan can be a good option if I think rates will stay low for the long-term.  But remember this, if you are wrong and rates go up substantially, your payment will increase dramatically with rates.

 

Interest Only Mortgage

While most mortgages are considered “repayment mortgages,” the interest only mortgage only involves repaying the interest on the loan; you’re not making any dent in the mortgage itself. This means your payments will be very low (which is good for cash flow) but of course means the total amount you owe won’t shrink!  The risk with an interest only mortgage is if property values decline and you need to sell while those values are low.  In addition, because there is more risk to the lender  with an interest only mortgage, these loans are usually harder to obtain.

 

So, What Type of Home Mortgage is Best for You?

The best type of loan for you will ultimately be the one that helps you get the payment you can afford for the house you’re buying, but also makes the most sense for the time you’ll be in the home.  For most people, houses become homes, they involve family memories and neighbors who become friends, and we don’t move very often.  For those people, most of the time a fixed rate mortgage is the best option. But, for people who know they won’t be in their home long-term, an ARM loan might be the best option.  And, in rare cases, when your monthly cash flow doesn’t match your needs, an interest only loan can make the most sense. What remains, is deciding what rate you want to pay and how quickly you want to pay your mortgage off.

  • Do you pay a lot each month and quickly pay off the entire thing?
  • Or do you pay off less, but for longer?
  • What other choices will impact your cash flow, like kids and day care?

This decision can drastically impact your disposable income, your retirement, and your way of life, so it bears some thinking about!

 

Metro Credit Union | Best Home Mortgage Loans in Omaha, NE

Metro Credit Union Mortgage is the home lending side of Metro Credit Union. Buying your first home is a big step, but it doesn't have to be a scary one. The more you know about the home buying process, the more confident you'll feel about making these important decisions that will shape your future. When you're in the market for a home loan, you know you can trust your credit union to provide a great rate, great service, and all with fewer and lower fees. And, we've got you covered with a wide variety of lending options. Use our financial calculators for calculating a mortgage or  refinance.

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