Buying a house, or refinancing, means that you have to apply for a mortgage, or loan on the house. There are many different forms of loans available, but selecting the right one can be more than a little difficult – since so much money rests on that choice. Here are some tips that will help you to make that right decision.
Know The Terms And Types
This one thing could definitely save you some money. By understanding how mortgages work, and what kinds are available, you can avoid a lot of mistakes and extra expenses. It would also be worth your while to learn about scams that are out there, and how to recognize them, since they seem to be on the rise.
Traditional Types Of Mortgages
All mortgages will basically come in one or the other of these forms. They will be either a fixed-rate mortgage, or an adjustable rate mortgage. If they are fixed rate, then, like its name suggests, the interest is set and so are the payments. They will stay the same for the life of the mortgage. In times of an unstable economy, this is the better of the two.
The adjustable rate mortgage is one that “adjusts” with the times. Generally it has a fixed rate portion, often 3,5,7 years or more, and then becomes adjustable – changing periodically according to the economy. This means that your payment changes every period, whether it is yearly or monthly. When the economy is good, this is the cheaper way to go, and is often used to obtain a larger house than what you could normally afford. In tough economic times, however, your payment could double.
Other Types of Mortgages
Recently, a lot of “new” types of mortgages have sprung up. These appeal to different groups of people in various situations, and often cater to their needs – but more often to their wants, and give them products that are not in their best interests.
The first example of these is the 125% mortgage. Certainly, it does allow the borrower to consolidate debts and buy a larger house. On the other hand, many who have recently used this new product, suddenly discover that they have negative equity on their house, and that it will take years just to break even.
Another type is the interest only mortgage. While sounding good, its value is questionable. With many people having adjustable rate mortgages and this option, when their rates become adjustable – the rate is based on the principal owed, and after many years – it will still be 100%, or near it!
Finally, there are the 40 and 50-year mortgages. Being given the ability to greatly reduce the payment, people are actually trading up to owe more ? much more. Forgetting that the greatest joy of debt is to be rid of it, they set themselves up to be in debt forever. It would be wiser to buy a little less house, at an affordable cost, and then be free of debt to enjoy life debt free ? later on.
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