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What Mortgage Option Is Best for You?

mortgage optionsWhen you are thinking of buying a home, one of the most critical decisions you will have to make is what type of mortgage you should get. Mortgage options are incredibly varied, and each has its advantages and disadvantages. To help you sort through them, we have broken down some of the most common options below. One thing to remember on all of these loans is to check the early repayment penalties on the loan. If there are none, then you can strategically plan your mortgages for the cheapest current rate and then refinance if those rates change.

Fixed Rate Mortgage
This type of mortgage is usually 15, 20 or 30 years and has a fixed rate of interest for the duration of the loan. This means that there are no surprises as the economy goes through its boom and bust cycle. However, you could get stuck paying a high rate if interest rates fall during the term of your loan.

Adjustable Rate ARM Mortgage
This type of mortgage usually has a low initial interest rate for about two years. After that, the interest rate becomes variable, which means it can raise or lower depending upon the rates published by the Federal Reserve. This type of mortgage can be really scary, as your payment could and usually does change when there is a rate review. Usually these rates are reviewed every six months, but there are some mortgages that allow the rate to change only once per year. This type of mortgage is great if you are looking to get into a loan quickly, build your credit and then refinance into a fixed rate loan.

Interest-Only Mortgage
An interest-only mortgage is probably the riskiest type of mortgage for the homeowner. Its major advantage is that you are only paying interest payments for the term of the loan, so your payments are lower than with the other options. However, the problem is that at the end of the loan, you still have to pay back the principal, usually in a lump sum. If you can’t pay that lump sum then you will lose your home.

VA Loan
A VA loan is a guaranteed loan for eligible veterans and active duty personnel (and their families). These are usually very low interest rate loans and should be the first thing qualified individuals apply for. The downside of these loans are that the amount you can borrow maybe very limited. Some VA loans also place restrictions on the property in terms of its state of repair, etc. For example, you would probably not be able to purchase a “fixer upper” with a VA loan.

Whichever loan you choose, make sure you plan ahead and leave some room for changing circumstances. One of the things that catches people by surprise is the cost of repairs to the home. For example, a central air conditioning variable speed fan can cost almost $2,000 to replace, so make sure you are setting aside an amount every month for repairs. You may also want to check into a home warranty program that will cover most of the major repairs in your home.

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