Next to deciding on the house you’ll buy, choosing the right type of home loan is the most important decision you’ll need to make as you buy a home. The loan plan you pick bears a considerable influence on the total cost of the house.
As such, you need to give it some serious thought before reaching a decision. Typically, a fixed-rate mortgage is the most popular with homebuyer but that doesn’t mean that you should follow suit.
For the best results, you need to account for specific needs and circumstance. Only then can you reach a credible decision.
1. How high is your risk tolerance?
If you aren’t the one to gamble with mortgage rates, you are better off with a fixed-rate loan. The monthly payments remain constant through the loan’s lifespan. That way, you can project and predict how much money you need to meet your obligations.
However, it is worth noting that this assurance comes at a cost. In most cases, this fixed rate is higher than the prevailing interest rate. But on the flipside, the peace of mind that comes with knowing that no nasty surprises await you each month makes it an excellent choice.
As a result, it is popular with people who are risk averse or need a clear sense of direction.
2. How long do you plan to keep the house?
If you plan on hanging on to the house for a couple of years, say less than seven, you are better off with an adjustable rate mortgage. The initial years of this loan feature a fixed interest after which the rate adjusts according to the prevailing interest rates.
As such, if you plan on selling the house after a couple of years, you can take advantage of the lower interest rates. Just be sure to sell before the rates adjust.
Key to successfully buying a home is the ability to pick the best mortgage plan to suit your needs. Therefore, you need to approach the mortgage process with a bit of caution.