Whether you already have a mortgage and are looking into your options for now and the future, or you’re shopping for a first home, it’s a good idea to be aware of all of your choices. Not all mortgages are the same – and they aren’t one size fits all.
We’ve laid out some of the considerations you’ll want to think about and review the home loan financing options to help simplify the process.
In general, two main things you’ll want to consider are the rate structure of your mortgage and the term. These have big implications for the amount of interest you’ll pay over the life of the loan.
Mortgage Rate Type
The two most common types of APR configurations are variable-rate and fixed-rate.
As a reminder, APR is the annual percentage rate or the total amount you pay each year to borrow money from a lender – interest and fees included. The key difference is variable-rate is just how it sounds – the actual APR rate of your mortgage can fluctuate over time, typically within some specified range.
Variable-rate mortgages are also known as adjustable-rate mortgages. The two terms are synonymous. In today’s environment and current low rates (as of March 2021), you probably won’t hear much about variable-rate mortgages, but should still understand how these mortgages work.
The starting APR on a variable rate mortgage is typically lower than a fixed-rate mortgage. This starting APR lasts for a specified period – i.e. five years. If you’re planning to be in a house for a short time, and traditional mortgage rates are high, this might be a good option for you.
However, if you’re going to be with a mortgage for the long haul, you’ll want to consider how stable the adjustable-rate mortgage will be. Different mortgages will have different stipulations on how much the mortgage rate can change and to what extent.
For example, a particular mortgage might change by 0.5% each year up to a maximum APR of 13%. Different mortgages are also tied to different financial indexes. If you are getting a mortgage through your local credit union, check with their loan team to discuss the potential stability of available adjustable-rate mortgages.
Another pro of variable-rate mortgages is that if interest rates drop, you will benefit from that without having to refinance!
On the other hand, with a fixed-rate mortgage, you have the same APR for the life of the mortgage. If mortgage rates are low at the time of buying, you’ll want to lock that in.
As opposed to variable-rate mortgages, there are no surprises over the life of the mortgage. This means that if interest rates rise after you get your mortgage, you don’t have to worry. However, if interest rates drop and you want to take advantage of that, you’ll have to refinance.
Mortgage Term Options
The term of your loan is the repayment period – how long you’ll be making payments. 15-year and 30-year terms are very common. This choice will affect your monthly payment, the total interest you pay, and likely your APR as well.
If you have a shorter term, you’ll have higher monthly payments, but you can usually obtain lower interest rates. Additionally, the less time you’re paying back the mortgage, the less time you’ll accrue interest and the lower total you’ll pay.
If you have a longer-term, you’ll pay less per month, but a longer-term usually comes with a higher interest rate. Paying back the interest over a longer period means you’ll accrue more interest overall.
Deciding between different mortgages with various terms and APR can be difficult. The best way to compare is to use a mortgage cost calculator.
You can check out our financial planning calculators to help understand how much you’ll pay for your mortgage.
If you’re a first-time home buyer, there may be other factors to consider. Depending on the state you live in, you may be able to access aid to help you purchase your first home.
For example, in Massachusetts, Jeanne D’Arc helps its members access the MassHousing loan program. This assists with your home cost with a low and fixed APR. Jeanne D’Arc frequently offers First Time Home-Buyer Seminars and offers $500 off closing costs to attendees who close a first-time mortgage with the credit union.
For service members, there are additional programs to help purchase a home. This includes up to $2,000 of your monthly payments covered for six months.
Be sure to contact the loan team at your local credit union for assistance and information about the benefits available to you.
Home Loan Refinancing
Another option to be aware of as a homeowner is refinancing. Refinancing is the process of replacing your current mortgage with a new mortgage. In other words, you use a new loan to pay off your current loan. Refinancing can help you save money on your monthly payment, take advantage of lower APR, or shorten your term.
To put it another way, know that even if you sign your name to a mortgage, you’re not stuck forever. It’s a good idea if you are getting a mortgage to ask what the stipulations are for early repayment, though, as this might limit your ability to refinance in the future.
Learn More About Home Loan Financing Options
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