The most important decision you will ever make (other than who you marry) is buying your first home, or really any home for that matter. The next most important decision is the type of mortgage loan you are going to take out. This might seem minor in comparison, but paying for a house is easily the largest cost you will ever take on in your lifetime. I am on my second home right now and I sometimes wonder if I would’ve been better off renting. But if done right, buying a house can be one of the smartest financial decisions you can make. A quality home in a good area will appreciate in value, and with the right loan you can avoid paying more than is necessary. So, what does the “right loan” mean? Simple, just read below.
There are two common types of loans, one is variable, and the other is fixed. A variable rate loan is something that many potential homeowners are drawn to. The reason is that they are almost always the lower option, and in the short term they offer lower payments and less in interest charges. However, these types of loans can have major drawbacks if you plan on keeping the loan past the variable term date, in which case you will need to take out a new loan at an entirely new rate. Seeing as how we are in a time of historically low interest rates that could be a dangerous move to make. Variable rate loans tend to work best for people who are expecting to change jobs and move to another location, or simply plan on using the home as a short term investment. This is not an option for someone who doesn’t plan on selling the home prior to the rate expiration.
This is where a fixed rate loan comes into play. As I said before, we are in a period of historically low interest rates. That means that you are probably best to lock in a longer term fixed rate loan right now. The best part, your mortgage repayments stay the same during the fixed rate term. This obviously benefits those of you who want to stay on a strict budget. It makes it much easier when you know what your payment is going to be month-to-month going out the next several years. This also takes out the worry and uncertainty that goes along with variable rate changes. If you are the type that is risk adverse then I would eliminate the guess work and play it safe.
There are also hybrid type loans with a fixed rate for so many years before changing to a variable rate, or vice-versa. A lot of these can be tough to understand and not something you need to get into.
Variable rate loans may not be your best choice right now. Interest rates will likely go up in 2015 though no one really knows by how much. If you know that you will be able to pay off your mortgage within five years or so (maybe you’ve got a nice bonus coming) then variable rate loans may be the right one for you. Otherwise, it’s hard to go wrong with a fixed rate loan, especially with rates as low as they are now.