There is no “right” mortgage, just the best one for you
Determining the best mortgage option for your new home can depend on many different factors, including the current state of the market, your current financial situation, and where you foresee both of them going. Whether you choose options like a 15-year fixed mortgage or a 30-year variable rate mortgage with a balloon payment will depend on your unique situation.
Your first step should be meeting with lenders to find out what mortgages you qualify for, given your credit score, income, and debts, among other factors. Once you’ve determined what you can borrow, you’ll want to consider the following items when choosing between a fixed-rate mortgage and a variable-rate mortgage, typically referred to as an adjustable-rate mortgage (ARM).
15-year fixed mortgage vs. 30-year fixed mortgage
These mortgages are relatively the same. However, given that a 30-year fixed mortgage is a longer-term loan, your average monthly payment will be less. Paying off a loan for 30 years is one of the most common mortgage options. In fact, many homebuyers need a 30-year term to be able to afford to purchase a property. However, those who want to pay off their mortgage sooner and have the means to do so often go with a 15-year agreement.
Advantages of a 15-year mortgage
A 15-year mortgage is a fixed-rate mortgage that fully amortizes after 15 years. This means:
- Less interest: Since your loan is on the shorter side, you’ll pay significantly less interest over the life of the loan than you would over a 30-year period since you’re racking up interest on the principal for a less amount of time.
- Faster equity stake: The more you pay towards your loan each month, the more you’re gaining in ownership of your home – at a much faster rate.
- You know what to expect: Fixed-rate mortgages are predictable. Your mortgage payment will remain the same throughout the duration of your loan, allowing you to plan ahead. This is the main reason homebuyers choose a fixed rate over an ARM.
The ideal borrower
15-year fixed mortgages are the best option for those who prefer the security of fixed monthly payments and can afford the relatively large monthly payment. If you can swing this loan and plan to live in your home for 10 or more years, this might be the option for you.
Types of ARMs
Adjustable rate mortgages are loans in which the interest rate changes based on a specific schedule after a “fixed period” at the beginning of the loan. This is riskier than a fixed-rate because the payment can change significantly and frequently. With a one-year adjustable-rate mortgage, you’ll receive a 30-year loan during which the rate can be adjusted every year on the anniversary of the loan. However, these rates are fixed for a defined amount of time.
For example, with a 10/1 ARM, there’s an initial interest rate that is fixed for the first ten years. After that, the rate adjusts each year for the remainder of the loan. In the US, the mortgage interest rate is typically based on changes in the present U.S. Treasury rate.
ARMs come in several different types – 5/1, 3/1, 7/1, 5/5 – that can be chosen depending on what works best for you. The most popular option is a hybrid ARM, such as an ARM with a balloon payment. These are fixed, short-term mortgages that follow an amortization schedule similar to a long-term fixed mortgage. Balloon terms are typically for three, five, or seven years. At the end of the term, you’ll have to pay off the resulting balance, usually by refinancing.
Advantages of an ARM with a balloon payment
In exchange for the risk associated with an ARM, the homeowner receives an interest rate lower than that of a 30-year fixed rate. People who prefer ARMs with a balloon payment have the following expectations:
- They will have greater financial stability in the future
- They will sell the home before the initial, fixed interest rate concludes
- Interest rates will remain stable or decline
The ideal borrower
ARMs with a balloon payment work best for people who like the stability of fixed payments but can’t afford a long-term mortgage. Investors also like balloons because, instead of paying higher monthly payments, they can use the extra money to make higher-yielding investments. These types of loans are also ideal for those who expect to be in a better financial position in the future.
If none of the basic options seem exactly right for you, there are plenty of other mortgages out there to fit your particular situation. There are also experienced professionals to help walk you through the process, including lenders and your Realtor.
Dante Disabato will work tirelessly to ensure that his clients are satisfied with both their new home and their plan to pay it off. Get in contact at 239.537.5351 or through our online contact form to take the first steps toward buying today.