Buying a home can be a long and complex process, and for first-time home buyers it can also be confusing. With lots of different loan products being offered by lots of different lenders, it can be difficult to make sure you get the best type of home loan to fit your situation, and the one with the best interest rate. Luckily, we’re here to explain the pros and cons of some of the three most common types of home loans!
Fixed Interest Mortgage
One of the most common types of home loans is the fixed interest mortgage, and for good reason. With this type of loan, your interest rate will remain the same for the entire life of the loan. Payments will also be fixed for the life of the loan. This type of loan makes budgeting easy as you never have to worry about fluctuating payments or interest rates.
Fixed rate home loans offer security and stability during an unstable economy, but the downside of this type of loan is that the first few years on a long-term loan are full of front-loaded interest payments. This means that only a small portion of your payment is actually going to pay down the principal portion of your home loan during the first few years.
Basically the opposite of a fixed interest mortgage, an adjustable-rate mortgage has an interest rate that is adjusted at set intervals of time over the life of the loan. The interest rate may be adjusted once a year, or it could be set up to adjust every 3, 5, 7, or 10 years. Adjustable-rate mortgages are best used in a high interest rate environment with the hope that by the time the rate is adjusted, interest rates will have decreased vs. the rates available in a fixed rate mortgage.
Interest Only Mortgage
An interest only mortgage is usually used for buyers looking for especially low payments for the first few years of the mortgage. Because only interest is required to be paid initially, payments will be low but this type of loan will cost you more in interest over the life of the loan since you are not required to pay down any principal initially.
There are pros and cons to each of these three most common types of home loans, and each has specific situations where they will work best. To find out more about which type would be best for your situation, be sure to do your homework and speak to a lending professional.
Photo from Zillow.