Richard Tschernia is a Senior VP Affinity Lending who assists individuals in receiving affordable home mortgage rates. In the following article, Richard Tschernia discusses the various types of mortgage loans available, and why a standard rate mortgage may not work for every client.
Anyone who buys a home or property will likely have to take out a loan in the form of a mortgage. Mortgages can be complex and difficult for the general homeowner to understand.
The three main types of mortgages are fixed-rate mortgages, adjustable-rate mortgages, and conventional mortgages. A fixed-rate mortgage is a loan that will be associated with a single interest rate for its entire duration. Adjustable-rate mortgages will have an interest rate that fluctuates with the market. Conventional mortgages are loans that are acquired from a private lender.
Below, Richard Tschernia dives into the details of these three types of mortgages, and reviews the benefits of each helping potential homeowners decipher the terms and understand which option is best for their situation.
Types of Mortgages
An understanding of the different mortgage types is an excellent way for first-time homebuyers to choose the best option for their financial circumstances and future plans for the property. Let’s take a look at the three most popular options, including a fixed-rate mortgage, a conventional mortgage, and an adjustable-rate mortgage, below.
Fixed Rate Mortgage
Richard Tschernia says that a fixed-rate mortgage is a type of loan that is associated with a fixed interest rate, meaning the rate does not change at all throughout the course of the loan period. The terms for this mortgage type are incredibly consistent from one lender to another, and usually last for 15 or 30 years.
This loan is ideal for homebuyers that want a predictable and
consistent monthly payment amount. This is a common choice when homebuyers are already pushing the top end of their budget for home expenses and can’t afford to pay more if the market were to suddenly change.
The main benefit of this mortgage is the ease of budgeting, understanding that the monthly payment will be the same no matter the market, throughout the length of the loan. Richard Tschernia explains that as the years pass, the homeowner will begin paying more of the principal amount and less in interest (since there is less interest accruing as the principal is paid off), but the overall payment each month will never change.
These mortgages are best for home buyers that plan to stay in the home for at least 5 years and secure a low interest rate. Obtaining a fixed loan when the interest rate is high would require refinancing when the market changes in order to take advantage of a lower interest rate.
Conventional Mortgage
Richard Tschernia reports that a conventional mortgage is any mortgage that is not offered by a government entity. These loans come instead from a private lender. With this loan, the long-term borrowing costs are lower and there is more flexibility in the terms. Conventional mortgages almost always have a fixed interest rate.
The other main benefit of this type of mortgage is that mortgage insurance won’t be required after a certain milestone; this can translate to some big savings. After reaching
20% equity, the homebuyer can request that the lender cancels their PMI (private mortgage insurance). Plus, if the homebuyer can pay a down payment of 20%, they won’t ever have to think about PMI at all.
Richard Tschernia says that an excellent credit score and a significant down payment are the best pairings for this mortgage rate. However, the option is there to pay as little as 3% down for a new home as long as the qualifying conditions are met.
Adjustable Rate Mortgage
An adjustable-rate mortgage is a loan type with a fluctuating interest rate. As the housing market changes, the amount of interest paid each month will also change accordingly. Sometimes this will result in smaller payments, but other times, the monthly mortgage payment will be more expensive.
Richard Tschernia explains that adjustable rate mortgages are best for people that won’t be staying in the home longer than 7 years. In the short term, an adjustable-rate mortgage can end up saving the homeowner some money, since the starting interest rate will be lower than the average fixed rate at the time and will be guaranteed for a period between one month to as many as ten years.
Adjustable-rate mortgages are much more complex and unpredictable over time when compared to fixed-rate mortgages, but they can be highly beneficial in the short term.
Final Thoughts
Just like anything else in life, Richard Tschernia says that there are advantages and drawbacks to every mortgage option. When a homebuyer understands their financials and is aware of their long-term goals for the property, they will be able to choose the best fit when it comes to their mortgage.
