What Type of Mortgage is Right for You?
Have you ever had the suspicion that renting is a financial mistake? You may be right. Recent studies have shown that the cost of buying a home is up to 40% less than the cost of renting for life. Yet, making the transition from renting to homeownership involves a series of hurdles, the biggest of which is getting a mortgage.
The good news is that mortgages come in a multitude of types. Choose the right mortgage, and you will be set up for success.
If you want a low monthly payment . . .
The best way to keep your monthly mortgage payment low is to pay at least 20% of the price of the home as a down payment. When you buy a home with a 20% or greater down payment, chances are good that your monthly mortgage payment could be cheaper than rent at a similar property! Fail to make a 20% down payment, and you will be saddled with expensive mortgage insurance or exorbitant interest rates.
If you’re short on cash . . .
Of course, not everyone who wants out of the rental trap has enough money to spring loose with a 20% down payment.
By choosing the right loan options, you could pay as little as 10% down on your home. You may opt for private mortgage insurance through a lender of your choice, or you may apply for a loan from the Federal Housing Administration. Both will mean higher monthly payments, but if you can afford those payments, they may be worthwhile.
If you want to pay off your mortgage before the kids hit college . . .
Lenders offer a variety of loan durations. Assuming your children are still toddling around the house, a fifteen-year-fixed-rate would mean your mortgage is paid by the time they are off to college. If your children are older, a ten-year-fixed-rate could do the trick.
Remember that paying a loan off faster means paying more money at a time; the shorter your loan, the higher your monthly payments. Make sure you don’t stretch the budget too far, or you might end up having to apply for a second mortgage rather than paying off your first mortgage fast!
If you have enough cash to pay outright . . .
Good for you! If you can pay for a new home outright, there’s really no need to get a mortgage. Just make an offer to the seller and cross your fingers that they’ll accept!
If you don’t know how long you’ll keep the home . . .
There’s a caveat to the “buying is cheaper than renting” rule. If you don’t plan on staying in a home for more than five years, your home probably won’t have time to appreciate enough that you break even on transaction costs for buying and selling your home. Essentially, you’re losing money whether you choose to buy or rent—and if you rent, you won’t have homeowner expenses and responsibilities like property tax, insurance, and repairs.
Now that you are familiar with some different types of mortgages, go out and get shopping! Remember to compare mortgages from multiple lenders, as different lends will offer you different rates and terms. Pick a mortgage with a down payment, monthly payment, and duration that works for you. There are plenty of options out there, so do the work and find the right one for you!