Owning a home is a dream for everybody, but making it a reality is not so easy. It is a huge decision and responsibility. The idea of committing to a 20-30 year mortgage is scary and stressful. One has to keep a lot of factors in mind- the type of house, affordability, building equity in the current housing market and so on. Understanding the many mortgage options and the effect of the constantly changing interest rates on it is challenging for people to understand fully. Fixed rate mortgages and adjustable rate mortgages are easy to understand, and here’s how-
Fixed Rate Mortgages-
In this kind, the buyer has to pay the same amount throughout the length of the mortgage period. Be it 25 years or 30, the rate of your mortgage will not increase for the life of your loan. This type of loan is beneficial because the borrower can set a budget of monthly expenses and plan ahead, since the amount is constant every month. They are considerable easy for a new home buyer to understand and better for those especially who can’t spend more than the budget and can’t deal with surprises. It is also a good option if one plans to stay in that house for the length of the mortgage period. Although, if the home value drops the fixed mortgage can’t protect buyers and payments can become overvalued as equity falls behind.
Adjustable Rate (ARM) mortgages
In ARM, the rate sets the price of mortgage. So the adjustable rate can increase or decrease depending upon the equity rate. These rates are usually lower than the fixed mortgage as they reflect short-term rates and which is why, due to smaller interest rates, it allows buyers to purchaser larger, more expensive homes. But the rates can increase as well, so it’s better for those who can risk that and wish to buy larger homes but can, if need be pay off when they interest rate increases. Although, most ARM rates start of as low, and eventually in the long term can increase as the rates reset to a market rate.
For instance monthly payments on a $400,000 loan for a 30 year fixed rate mortgage at 4.31 percent world be $1981.84 compared to a 1 year adjustable rate mortgage at 3.00 percent, which would be $1686.00 resulting in a savings of approximately $300 per month.
When rates are lower, first time buyers are compelled to make the purchase without fully understanding the situation they are getting into for a long time. Along with the mortgage rates and overall cost of the home, the buyers also need to understand things like the amortization period, payment options and how different kinds of mortgage rates can be affected over time.
Many people have a misconception that to keep the repayment low, they should take a longer mortgage and the overall cost will be less. However, if a 15 year term is taken, then the total interest payable on the loan is significantly less than say on a 30 year mortgage.
For a first-timer buying a house is special, exciting and scary as they may not have a proper understanding of the processes that underlie the purchase of a house hence, it is imperative to educate yourself about what you are getting into.
With Super Rates, potential homeowners in the Greater Toronto Area can get a quick and easy portal that provides access to the best mortgage rates that the local market can offer. They can even create opportunities and better mortgage rate terms for clients by negotiating on their behalf.