A mortgage is probably the biggest financial decision you are ever going to make, so it`s important you make the right choice. Although there are a lot of different mortgage products on the market today, when you get down to it, there are really only two types of mortgages. These are fixed-rate and adjustable-rate. Which one is best for you depends on a number of factors.
Fixed-rate mortgages are pretty self-explanatory. The interest rate is fixed and doesn`t change unless you alter the mortgage in some way or don`t fulfill the terms of the contract.
Fixed-rate mortgages have several advantages. For one, you will always know what your principal and interest payment will be. Mortgages are amortized over the term of the loan, so you always pay the same amount, even the amount that goes toward interest and principal changes. This makes it easy to budget because you will have a fixed cost for however long the term of the loan is.
Another advantage is that when interest rates are low, you lock in the low rate without having to worry what will happen if interest rates rise. This helps you save money over the long run by financing at low rates.
A disadvantage to getting a fixed-rate loan is that if you do so when rates are high, you are locking in a high rate and the only way to take advantage of lower rates if interest rates go down is to refinance. This requires applying for another loan and paying thousands of dollars in fees.
Fixed-rate loans make sense when rates are low for people who plan to stay in their home for a long time. These loans can come in several different lengths, but the most common ones are 30 years and 15 years. With a 30-year loan, your monthly payment is less, so you can afford more house. The advantage of a 15-year loan is, because you are paying the loan back sooner, you pay much less in interest and save money over the long run.
Adjustable-rate loans come in many varieties, but the basic premise of these loans is that they have an initial fixed-rate period and when it expires, the rate can fluctuate.
Most adjustable-rate loans are actually 30-year loans in which the first few years have a fixed rate that`s lower than the market rate. At the end of the fixed period, the rates can adjust up or down on a set schedule such as monthly or annually. The loans usually have a floor or a ceiling meaning they can`t go higher or lower even if the prevailing rates are higher or lower.
The advantage of a an adjustable-rate mortgage is that for a few years, usually one, three or five years, you get a lower rate, which can save you money. Adjustable rates make sense when interest rates are high and are likely to decrease. They also make sense for people who don`t plan to stay in a home long, such as a real estate flipper or for people who`s household income will increase before the rate resets, such as someone in medical school or a married couple where one spouse temporarily stops working to care for children but plans to re-enter the workforce at some point. Fixed-rate loans can be a problem, however, if rates rise or if a buyer`s expected income increase fails to materialize.
Whatever type of loan you decide to get, you need to make sure your investment is protected and a good way to do that is to make sure you have an adequate insurance policy. You can research policies and compare rates online at lifeinsure.co.uk or other life insurance websites.