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How To Determine The Best Mortgage Program For You

The mortgage industry has become increasingly competitive in recent years, with providers of all shapes and sizes offering incentives to homeowners looking to refinance or buy their first home. But with so many different mortgage products available on the market, how do you know which one will be the perfect choice for your financial situation?

Finding the right mortgage program can be frustrating, especially if you're not familiar with the terminology used or the steps involved in the process. Several different kinds of mortgages vary significantly in terms of interest rates, fees, and more, so it's vital to understand the difference between them to ensure you're getting the best deal possible. This mortgage guide will walk you through everything you need to know about mortgages and help you determine which one is suitable for you.


Understanding the Mortgage Basics

So, what exactly is a mortgage? A mortgage is a loan that lets you purchase a home. The money for your down payment and closing costs comes from a bank or other lending institutions, and you agree to pay it back over time (with interest). Even though each mortgage lender has its unique process, getting a mortgage typically starts with applying. Your lender will then evaluate your credit history and income to decide whether you qualify—and what kind of mortgage deal they'll offer you.

There are several types of mortgage programs to choose from, each with its own sets of pros and cons. However, these mortgages fall into two main categories, including fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs). Your lender will advise you further on which option fits your situation, depending on your qualifications. Ready to work with us? Learn more here.


Nice home in Fernandina Beach Florida


Before deciding which type of mortgage is best for you, it's essential to understand what each option offers. Let's take a quick look at these mortgage options:


Fixed-Rate Mortgages (FRMs)

Fixed-rate mortgages are beneficial because they offer a fixed interest rate throughout your loan duration. This means that your payment amount will remain constant for however long you decide to keep your loan, so you don't have to worry about fluctuating rates from month to month.

The type of mortgage has a set interest rate that remains unchanged for the entire servicing period; in exchange for your loyalty, you receive stability and security. If you plan to live in your home for a long time (like 30 years) and avoid any surprises, it might be worth going with a fixed-rate mortgage.


FRMs Pros

  • A set interest rate that doesn’t change over time.

  • You can choose how long the set interest rate stays constant by picking a two-year, three-year, etc. Some lenders offer up to 10 years.

  • You feel secure and have peace of mind knowing how much you’ll be paying per month without expecting any surprises.

  • Lenders compete on offering the best rates, meaning you can easily land an excellent fixed-term deal.

  • Since lenders calculate interest on the total sum owed, you’ll end paying the most interest at the initial stage of your mortgage.

FRMs Cons

  • Expensive agreement fees
  • Early repayment charges
  • Loss of flexibility

Adjustable-Rate Mortgages

On the other hand, adjustable-rate mortgages provide lower initial rates than their fixed counterparts, but ARMs rise or fall based on index and margin. This means if the interest rates rise, so will your monthly payments. The actual interest rate on an ARM is usually lower than a fixed-rate mortgage, making ARMs a little attractive. If you're more comfortable dealing with fluctuations in interest rates—and understand that when rates drop, your monthly payments will be less expensive, then an adjustable-rate mortgage might be better for you.


ARMs Pros

  • ARMs have lower interest rates than their counterparts, FRMs.
  • With the lower interest rates, you can disburse more principal per month.
  • The interest rates can go down sooner.

ARMs Cons

  • Rates can rise unexpectedly.
  • The monthly payments can quickly fluctuate.
  • Particular repay caps can result in negative amortization.
  • You can't determine your financial status when the rates change.

Understanding the Common Types of Mortgages

The typical mortgage options that fall into the two categories (FRMs and ARMs) include but aren't limited to Subprime Mortgages, Balloon Mortgages, and Interest-Only Mortgages. Let's discuss each in deep detail:


Subprime Mortgages

A subprime mortgage refers to a mortgage given to a borrower with poor credit. If you are looking to buy a home and have little or no credit history, you may be considered subprime and need a subprime mortgage. These mortgages are known for their high-interest rates, but they often come with lower down payments than traditional mortgages. You must pay higher closing costs as well, though many lenders help cover these costs in exchange for other fees tacked onto your loan amount.


Balloon Mortgages

Balloon loans are one of several types of mortgages. The balloon is an amortization schedule describing how a borrower repays their loan over time. Balloon loans have a large, lump-sum payment at the end (balloon), making them popular with short-term borrowers who'll be selling or refinancing before the end of their loan period. However, balloon loans can come with substantial prepayment penalties and aren't always a good option for lower-income borrowers.


Interest-Only Mortgages

An interest-only mortgage allows borrowers to reduce their monthly payments by spreading their interest payments over a more extended period. This is an attractive option for many borrowers because it doesn't have prepayment penalties, allowing you to qualify for larger loans. However, like other mortgage options, there are drawbacks associated with Interest-Only mortgages that you must carefully consider before choosing one in particular.


An Essential Thing to Avoid When Selecting Your Mortgage

Most mortgages, particularly those with low-interest rates, come with a prepayment penalty. Most commonly, these are three to four months of interest on top of whatever you’ve already paid if you pay off your mortgage early. Prepayment penalties will restrict your ability to exit an investment and prevent you from locking in short-term rates.

It's always a good idea to skip mortgages with prepayment penalties and go for those that don't have them; they won't stick you with excess fees if you decide to move earlier than expected. However, if you're planning on holding onto your house for more than five years, then it may make sense to sacrifice some flexibility with prepayment penalties.


Conclusion

Buying a home will probably be the most significant investment you'll ever make, so you'll want to think carefully about the financing options available to you and how they'll impact your monthly payment and your bottom line. Fortunately, many mortgage programs cater to people with diverse credit scores, assets, and income levels. So no matter what financial profile you have, there's probably a mortgage program out there to give you the loan you need. You may read more about our mortgages offered here.

Find The Right Mortgage

For more than 20 years, Phil have been helping customers achieve their home purchase and refinance goals by providing them with invaluable resources and support.

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