Buying a new house is always exciting. However, between your dreams of how you’ll decorate it and your plans for life in your new home, you’ll likely come up against thoughts of the mortgage.
Especially as a first-time homeowner, choosing the right mortgage can seem daunting. And if you’ve owned a home before, you may be wondering whether the type of mortgage you chose for your previous home will be right for your current situation.
The 2 Main Mortgage Types
First of all, there’s a variable mortgage. As the name suggests, these mortgages are variable. That means the interest rate on each mortgage is subject to change, which can cause your monthly mortgage payment to increase or decrease, depending on which way the rate swings.
Meanwhile, the other main type of mortgage is a fixed-rate mortgage. This is the opposite of a variable mortgage, in that the interest rate will stay the same for the entire time you hold the mortgage. A lot can change over 30 years, but your interest rate won’t, as long as you have that mortgage.
Practically speaking, this means that your monthly payment will stay the same, at least as far as paying off the principal (the money the bank has lent you) and the interest. You could still experience some minor fluctuations, thanks to homeowners’ insurance and property taxes, but not as far as paying off the actual mortgage goes.
When you visit a mortgage comparison site, you’ll notice that the deals you’re shown will be divided according to the two different mortgage types.
The Advantages of Fixed-Rate Mortgages
A fixed-rate mortgage is a very popular choice, which makes sense when you consider the stability that it offers. Regardless of whether the economy booms or busts over the coming years, with one of these, you’ll know that your interest rate will be constant. This stability helps prevent nasty budgeting surprises, which makes it easier for homeowners to make long-term financial plans.
Fixed-rate mortgages are generally simpler to understand than variable mortgages, which can be complicated and are often available in more than one type. If you’re a first-time home buyer, this may make a fixed-rate mortgage a choice you can feel more confident in making.
A Few Disadvantages of Fixed-Rate Mortgages
There are some disadvantages when it comes to fixed-rate mortgages. Due to the fact that the interest rate is guaranteed not to increase over time, starting interest rates can sometimes be higher than they would be with a variable mortgage. It can also be more difficult to qualify for a fixed-rate mortgage as opposed to a variable one. Both of these factors can limit the variety of homes you’ll be able to afford.
Also, while a fixed-rate mortgage will protect you from a rise in interest rates, you’ll be left out in the cold if interest rates drop. You could refinance in the future to take advantage of lower rates, but this can be a hassle, and you’ll have to pay certain fees all over again.
The Final Verdict
This type of mortgage is simpler to understand than the alternative, but it isn’t very customizable. You’ll be thankful for your choice if interest rates increase, but may wish to refinance if they decrease significantly. It all depends on how comfortable you are with risk, and what you feel is the right choice for your personal situation.
Are you thinking of buying a home soon? What type of mortgage are you considering? You can let us know in the Comments section below!