Austin Mortgage Loans 101
What kind of mortgage loan should I get when buying an Austin home?
This is a common question among home buyers, and rightfully so. The type of Austin home loan you decide to get will have long-lasting financial impact. After all, your mortgage loan will stay with you until you do one of three things -- pay off the mortgage, refinance the loan, or sell the house.
So before choosing an Austin mortgage loan for your home buying needs, it's crucial that you understand the pros and cons of the different types of mortgages. The first choice you will have to make is whether you want a fixed-rate mortgage or an adjustable-rate mortgage (ARM). So that's what we will focus on in this article.
Fixed-Rate Mortgage Loans - Pros & Cons
As you might have guessed by the name, the fixed-rate mortgage loan keeps the same interest rate over the life (or "term") of the loan. By choosing a fixed-rate loan, you remove all variables from the mortgage payment, so your payment will also stay the same over the life of the loan.
This is why many people shopping for an Austin mortgage will choose the fixed-rate mortgage in the first place. It gives you certainty over time. The interest rate (and thus the overall mortgage payment) will stay the same, regardless of what the economy does.
This all sounds well and good, but there is a downside to choosing a fixed-rate mortgage loan. In most cases, you will pay a premium for this long-term predictability, and it comes in the form of a higher interest rate.
When you think about it from the lender's perspective, you can understand why they charge a higher rate on fixed-rate loans. When an Austin mortgage lender grants home loans with a fixed rate over a long period of time (such as the 30-year norm), the lender takes on a certain amount of risk. For example, if the prime interest rate rises significantly during the life of the loan, your fixed rate will stay the same, so the lender will incur the additional cost.
This is why Austin mortgage lenders will usually charge a higher interest rate on a fixed-rate home loan than with the adjustable-rate loan.
When does it make sense to choose this type of Austin home loan? Well, if you plan on staying in the home for a long time (longer than 5 years, for example), then a fixed-rate loan might be the best way to go. That way, you can avoid the uncertainty of interest rate hikes over the life of your loan.
Adjustable-Rate Mortgage Loans - Pros & Cons
Now that we've discussed the fixed-rate mortgage, you can probably figure out how the adjustable-rate mortgage (ARM) loan works, just by the name alone.
The ARM loan is different from a fixed-rate mortgage loan in that the interest rate will adjust (or "reset") at some point in the future. Because the interest rate is a component of the overall mortgage payment, this rate adjustment means that your mortgage payment will increase or decrease as well. In most cases it will mean an increase in the payment, as the loan's original rate adjusts to the prevailing rates at the time of adjustment.
In most cases, the ARM loan will start off with a lower monthly payment than a fixed-rate mortgage. But "start off with" is the key part of that phrase, because at some predetermined point the rate on an ARM loan will begin to adjust. Normally, the first adjustment happens at the 3, 5 or 7-year mark.
Adjustable-rate mortgage loans have been in the news a lot lately, as they are partly responsible for the current rise in home foreclosures. In years past, many mortgage lenders extended subprime loans to homeowners who would probably not qualify for a loan under today's standards. Many of these subprime loans were also ARM loans, which made them more affordable for the buyers ... at least, initially.
But when these subprime ARM loans began to adjust to higher interest rates, a lot of homeowners were caught off guard by the size of the increase. Many of them were unable to afford the new payments, which is partly what fueled the record number of home foreclosures we are seeing today.
However, you can avoid this kind of unfortunate experience if you continue to educate yourself about the different types of Austin mortgage loans, along with their respective pros and cons.
For example, if you are only going to be in a home for three years or so, then the ARM loan can save you money by offering a lower interest rate. And if you sell the home before the adjustment period, you can avoid the uncertainty of that phase.
Mortgage Conclusion (And Beginning)
This article is not intended to be a complete mortgage education. Rather, this article is intended to start you on the path to understanding your Austin home loan options. The key is to continue researching your mortgage options so that you can find the best type of loan for your unique home buying situation.
