There are two common ways to get a mortgage: fixed-rate and adjustable-rate loans. While they differ in terms of who is paying them off, both have drawbacks and benefits. Here are the pros and cons of each type of mortgage, and some ways to get the best mortgage for you.
Fixed-rate mortgages
Fixed-rate mortgages are the most common way to get a mortgage. You borrow a certain amount for a set period of time, usually 30 years. The interest rate is fixed for that period. Interest is added to your monthly payment, but you pay the interest for all of the years you have the loan. It can be a better deal, especially if you need your money in a hurry.
There are two major drawbacks to this type of mortgage. One is that the loan is completely secured by the borrower's equity in their home. The other is that the borrower is locked into the interest rate for the entire time the loan is in place. If interest rates start rising and interest rates start falling, the borrower could be left paying more money for the same house.
An adjustable-rate mortgage
An adjustable-rate mortgage allows the interest rate to adjust to a more favorable level each year. You also take a lower initial down payment, and have a shorter repayment period. The monthly payment is lower than the fixed-rate mortgage, but you pay interest on all years' worth of payments until the loan is paid off. However, the borrower can often choose the rate they want. Some borrowers feel the need to move for work or for family, so the adjustable-rate mortgage may be the best solution for them.
The downside to an adjustable-rate mortgage is that it could be hard to predict the exact rate you will end up paying. Interest rates often fluctuate, so this type of loan isn't always the best deal.
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Default and non-payment penalties
Defaulting on your mortgage can be the worst thing that can happen to your credit score, and it could put your home at risk of foreclosure. The lender will put a lien on your house and won't allow you to sell it until you come up with the money to repay the loan. It doesn't sound like a big deal, but the impact can be a significant one. In some cases, a mortgage can get so out of control that the bank won't even consider it an option to file for bankruptcy and stop paying. It can make it more difficult for a borrower to ever qualify for another loan.
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