- If you are getting your first mortgage, there is a good chance you'll decide on a fixed-rate mortgage due to the predictability. It is the most common type for first time buyers, since the monthly payment will stay "fixed" for the duration of your loan. This makes it a low-risk loan, since you can engage in long-term planning and always know how much you will be paying each month. This also helps with inflation protection, since you will not be affected by increasing interest rates, though on the flip side you will also pay the same monthly installment, even if interest rates drop.
- Adjustable-rate mortgages (ARMs) are also very popular, because they help you qualify for a larger loan amount. They are based on the interest rate and have many different variables that determine your monthly payment, such as indexes, margins, adjustment periods, ceilings, caps and floors. There are also "hybrid ARMs," which have set initial periods and adjustment periods. Since the interest rate will change during the life of this type of mortgage, your payments may also fluctuate.
- Sometimes confused with an adjustable rate mortgage, balloon mortgages are a good choice if you plan on selling your home before the maturity date of the mortgage. Balloon mortgages allow you to have lower monthly payments, based on a 30-year amortization period, although your entire balance will be due within five to seven years, unless you reset your mortgage at that time.
- When you obtain a mortgage from a lender, you are using the home as collateral for the mortgage. Therefore, if you default on your mortgage for any reason, which means you stop making your payments, the lender that holds the mortgage on the home has the right to foreclose on the property. Foreclosure is when the lender takes ownership of the home. When a mortgage lender forecloses on the home, the home is typically sold at an auction in order for the lender to recoup as much of the money that is due to the lender as possible.
- Don't take a mortgage commitment lightly, because the risks are high. Before committing to the large financial responsibility of a mortgage, make sure you are in a position to keep your financial obligation. Have a savings of at least six months of expenses, in case of job loss or a chance in health. If you are having trouble with your payments, talk to your lender right away to discuss your options. You may be able to refinance or get a loan modification, reinstatement, forebearance or a new repayment plan. Although you may feel like you should avoid your lender if you are having trouble with payments, he is the first person you should speak with and can help you understand your options.
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