If you want to buy property, you almost always need to obtain a mortgage, but these loans aren’t all the same. Different types of situations call for different types of mortgages. How do you choose the right mortgage for your needs? While investigating your financing options, keep the following in mind.
Amount of Downpayment You Have Saved
Most mortgage lenders prefer a downpayment. If you make a downpayment, the lender doesn’t have to lend you funds equal to the entire value of the home, and if the property falls in value or you default on the loan, a down payment helps to protect the lender from losses. Additionally, if you can put up a healthy downpayment, you can save money on mortgage insurance.
If you don’t have enough money to pay 20% or more down on the property, you may want to look into government-backed mortgages with low or no down payment requirements. In particular, USDA and FHA loans only require small down payments, and VA loans often don’t require any downpayment.
Time You Need to Repay the Mortgage
The time you get to repay the mortgage is called the term, and mortgages typically have 15, 20, or 30-year terms. Generally, lower terms buy you a slightly lower interest rate, and you get the reassurance that you will pay off your home faster. In contrast, longer terms come with a lower monthly payment.
Ultimately, you need to balance your current budget with your long term goals. If you’re younger, a 30-year mortgage and relatively low monthly payments may be ideal, but if you’re approaching retirement, you may want to opt for a 15-year term and slightly higher monthly payments.
How Long You Plan to Stay in the Property
If you plan to stay in the property for the rest of your life or even just for 10 years or so, you generally want to choose a fixed-rate mortgage. A fixed-rate gives you predictability and ensures that your monthly payment won’t change for the life of the mortgage.
However, if you plan to move within one to five years, you may want to look at adjustable rate mortgages. These mortgages give you an attractive interest rate for a set number of years (usually one to seven), and then, the rate adjusts. If you plan to stay in the property, you risk facing a much higher rate when it adjusts, but if you plan to move, you get to take advantage of the low rate, and then, you move before the adjustment happens.
Type of Property You Want to Buy
You also have to consider the type of property you want to buy. For instance, if you’re building a home, you may need to obtain a construction loan. Then, when the work is done, you can transition to a traditional home loan. If you’re buying a commercial property, you may want to work with a lender that has experience with those types of loans rather than a lender focused on residential home loans.
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