When purchasing a home, buyers have plenty of options in the house hunting process. Once they make their decision, they face an important course of action: financing the home. Homebuyers have plenty of choices on what type of loan to buy. A common type of home loan, a fixed-rate mortgage, can help homebuyers afford their new space.
A fixed-rate mortgage has a static interest percentage throughout the whole term of the loan. Even if buyers face difficult times, like divorce, losing their jobs or a rocky economy, these loans stay the same. Because homebuyers like this stability, fixed-rate mortgages are the most popular type of home loan. Fixed interest rates can make it easier for buyers to budget their money than less predictable adjustable rates might.
Fixed- vs. adjustable-rate mortgages
When homebuyers first take out fixed-rate mortgages, they might pay more in interest than they would on an adjustable-rate mortgage. However, ARMs' interest rates rise after three, five or seven years, according to Bankrate. After this initial increase, these costs can fluctuate throughout the mortgage term.
Buyers typically pay off fixed-rate mortgages at a slower rate than they would pay off an adjustable-rate loan. Since the first few years of payment typically go toward interest, fixed-rate mortgages might not be a smart investment for buyers who might sell their home again in five years or less.
Fixed-rate mortgage terms
Homebuyers can choose the amount of years they can take to repay their home loans. Typically, individuals can take out fixed rate mortgages of 15- and 30-year terms. Both amount of time have different perks and downsides. Understanding these factors is crucial in deciding which mortgage term are the best fit for homebuyers.
30-year terms typically have a higher interest rate than 15-year terms, but longer terms have lower monthly payments. These lower monthly payments are appealing to buyers who want extra cash in their pocket for emergency spending. Freddie Mac said that over 90 percent of today's homebuyers get a 30-year fixed-rate mortgage.
15-year loans usually also require homebuyers to pay a lesser amount of interest over the loan's term. These mortgages are ideal for individuals who don't mind paying a higher monthly cost but who want to pay their home off faster.
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