You’ve found the perfect property in Charlottesville or in the surrounding countryside. Now it’s time to finance it. At first glance, the array of mortgages available today may seem overwhelming. Choosing the right loan depends on the amount of risk you are willing to take, the reliability of your income and the length of time you plan to spend in the home. However, no matter what type of loan you seek, they all fall into one of two basic categories: fixed or adjustable.
With a fixed rate mortgage your monthly payment will remain the same from the time you take out the loan until it is paid off. Classic fixed mortgages are paid monthly over a 30-year term, but they are also available in 40, 25, 20 or 15 year durations. A general rule of fixed rate mortgages is that the shorter the term of the loan, the less interest you’ll pay, although your monthly payment will be higher than that of a longer term loan. If you have steady income, a fixed rate loan is a good choice as it ensures that your payment will remain the same for the duration of the loan. If mortgage rates drop during the term of your loan, you may have the option to refinance.
There is also a biweekly fixed rate mortgage, in which you make half the monthly payment every two weeks which means you are actually making the equivalent of thirteen instead of twelve monthly payments each year. This accelerates the principal payment, thus reducing the interest paid over the life of the loan.
Adjustable rate mortgages (ARMs) are often a good choice if you anticipate an increase in income, a drop in mortgage rates or plan to live in the home for only a short time. As the name implies, the interest rate will vary over the duration of the loan depending on certain factors in the economy. Most ARMs have caps that limit the amount that the loan can go up in any given year and over the life of the loan. Your ARM payment also has the potential to decrease. There are even ARMs that convert to a fixed rate loan after a certain period of time.
ARMs are usually fixed at a rate for one year, three years or five years, after which the rate will vary at a pre-designated interval. At that point you will have to accept the variable rate or look to refinance. If you choose an ARM, be prepared for mortgage rates that may be higher at the end of your loan term than when you first started making payments.
Interest Only loans are available as either fixed or adjustable mortgages. As the name implies, you are responsible only for the interest on your loan for a specified period of time. Interest Only loans can be a great way to purchase a home during periods of high mortgage interest or to bridge the gap between the sale of an existing property and the purchase of a new one. However, be aware that at some point you will have to start paying the principal. At that point, your loan payments will jump substantially. These loans may work well for you if you are disciplined about saving and investing the principal you are saving so that it will be available when the principal portion of the loan comes due. If you are interested in this type of loan, make sure there is no prepayment penalty, so that if you want to start paying the principal at any time you are free to do so.
If you would like help determining which mortgage is best for you, please feel free to contact us. We will be happy to help and to refer you to a few local, professional lenders who specialize in financing homes and property in the Charlottesville, VA area.