The Different Types of Mortgages & How They Work With a Mortgage Broker
When purchasing a home, there are hundreds of mortgage products and options to consider. These can vary based on lender, loan amount, credit history and other factors. When selecting your loan type, ensure it matches your goals and financial situation.
There are two primary types of mortgages: fixed rate and adjustable-rate mortgages (ARMs). While the distinctions between them may be subtle, they can have a major impact on your overall loan experience.
Fixed-rate mortgages offer stability and security to borrowers by setting an interest rate that remains fixed throughout the life of the loan – typically 30 years. This type of loan is popular due to its predictable nature.
An adjustable-rate mortgage (ARM) features an initial introductory period during which the interest rate remains fixed; after this, it adjusts periodically according to market conditions. This type of loan is popular among borrowers who plan to remain in their home for several years as it usually offers lower introductory rates than 30-year fixed-rate loans.
Most ARMs feature an up move cap that limits how much the rate can increase during the introductory period. Usually, this limit is one percentage point, though it may differ between lenders.
Finding a great rate on an ARM requires shopping around. You can do this by working with a mortgage broker who has access to multiple lenders.
They can assist you in comparing different loan options and negotiating terms that benefit you most. Furthermore, they assist in speeding up the approval process to save time in the process.
A broker can assist you in finding lenders who offer loans tailored to your needs and budget. They typically have access to more lenders than you do, plus they handle all of the paperwork for you.
Selecting the ideal mortgage for you is a decision that will impact your finances for decades, so it’s essential to make an informed decision. Here are some of the most common mortgage options and how they work with a mortgage broker:
Fixed-Rate Mortgages
A fixed rate mortgage features an interest rate that remains constant throughout the duration of the loan, regardless of market fluctuations. This type of mortgage is best suited for borrowers with good credit and consistent income sources.
An ARM, on the other hand, has an interest rate that may fluctuate periodically based on an index associated with the loan. This index could be a Treasury bond, market indicator or any other financial indicator.
The two primary indices commonly utilized to calculate adjustable rate mortgage (ARM) adjustments are the Federal Open Market Committee’s Treasury index and London Interbank Offered Rate (LIBOR). Some ARMs also utilize Consumer Price Index or Freddie Mac’s index.
Ultimately, your decision about which mortgage type is ideal for you depends on a few factors such as your credit history, loan amount and objectives. Furthermore, keep in mind that not all mortgages are created equal – so don’t automatically assume one option is suitable for everyone.