The time has finally come to buy a home and you have been searching the internet for Calgary houses for sale. Before you proceed with an offer, you must first get your financial house in order. Once the down payment is saved, , there are many options available to select from. By learning as much as you can about each option, you can more effectively select the one that is best suited to your needs. To that end, here is a look at some of the basic mortgage loan options available.
Fixed Rate Mortgage
As the name implies, a fixed rate mortgage is one where the interest rate remains the same throughout the lifetime of the loan. Generally available in 10, 15 and 30-year terms, the fixed rate mortgage is the most popular option among homebuyers. The obvious advantage to this type of mortgage loan is the fact that you know exactly how much interest you will pay and you know how much your payments will be from year to year. As such, it is much easier to budget your payments. On the other hand, by getting a fixed rate mortgage, you are unable to take advantage of declines in interest rates unless you refinance the home. In this case, you have to pay the closing costs once more.
Adjustable Rate Mortgage
Adjustable rate mortgages, or ARMs, are different from fixed rate mortgages in that the interest rate does not remain fixe. Rather, the interest rate changes according to a specific schedule that is determined when the loan is first taken out. Since the payment amount can change dramatically over the lifetime of this type of loan, the ARM is considered riskier than the fixed rate mortgage. On the other hand, in exchange for taking this risk, you do enjoy a lower rate than you would with a fixed rate mortgage.
10/1 Adjustable Rate Mortgage
A 10/1 adjustable rate mortgage is a specific type of ARM in which the interest rate is fixed for the first ten years and is then adjusted each year for the remainder of the loan. With this type of loan, the owner enjoys the stability of a fixed rate mortgage while also receiving the lower interest rate associated with an ARM. For those who plan to live in their home for more than ten years, however, this may not be the best option.
A 2-step mortgage is another type of ARM, as the loan has a fixed rate for a certain time before having a different rate for the rest of the loan. When the adjustment time arrives, the borrower may choose between have a fixed rate or a variable rate for the remainder of the loan term. Most people who choose this type of loan plan to refinance or to move out of the home before the first period comes to an end.
5/5 and 5/1 Adjustable Rate Mortgage
With a 5/5 ARM, your monthly payment and interest rate does not change for five years, but is then changed every five years thereafter. A 5/1 ARM is similar, only the interest rate and monthly payment is adjusted every year after the first five year period is complete.
Also referred to as a “30 due in 5” mortgage, the 5/25 mortgage maintains a stable interest rate for 5 years. At the sixth year, the interest rate is adjusted according to the current rate and does not change for the remainder of the loan period.
3/3 and 3/1 Adjustable Rate Mortgage
Similar to the 5/5 and 5/1 ARM, the 3/3 and 3/1 ARM maintain a stable interest rate and payment for the first 3 years. On the fourth year, the interest rate is adjusted. With the 3/1 ARM, the rate is then adjusted every year thereafter, while the interest rate is adjusted every 3 years with the 3/3 ARM.
A balloon mortgage is similar to a fixed rate mortgage, but lasts for a shorter period of time. Furthermore, with a balloon mortgage, the monthly payments are low until the end, at which time a large “balloon” payment is due. The initial payments are lower because the borrower pays only the interest each month. For this reason, this is only a good option for those who can afford to make the balloon payment in the end.
Keeping good credit is essential for your mortgage qualification, you will want to ensure you have the best credit possible buy following these mortgage tips to improve your financial future.