If you’re buying a house, you’re probably going to have to get a mortgage. Few people have enough cash to buy a house outright, and if you want to invest in a rental home, leveraging your cash can get you a higher return rate. As successful investor Jim Randel states in his book, The Skinny on Real Estate Investing, “Like a lever which allows you to move objects too heavy to move by yourself, borrowed money allows you to achieve a return much higher than you would without borrowed money.” However, there are plenty of places to get mortgages from, and several different types of mortgages you can get, and it’s important to know them well so you can find the one that works best for you.
Interest Rates
The interest rate on your mortgage dictates how much money the bank charges you for borrowing its money. The lower the interest rate, the less you have to pay for your house or the more you’ll get back out of it when you sell it. This may seem basic, but it’s absolutely fundamental when purchasing a property to spend a lot of time looking at interest rate. Getting an interest rate that ¼% lower on a $100,000 house could save you thousands of dollars over the life of the loan. That’s why it’s so important to shop around to different mortgage companies to find the lowest interest rate you can, look at different mortgage options, and make sure your credit isn’t holding you back from getting a low rate.
Fixed Rate
Fixed rates are the traditional type of mortgage. With a fixed rate, your interest rate is frozen and guaranteed not to fluctuate over time. This is considered a safer and more traditional mortgage, and with interest rates as low as they currently are, it’s often the best choice. Still, it has a slightly higher interest rate than a variable rate mortgage, meaning that security over the long run will cost you more in the near future.
Variable Rate
Variable rate mortgages may seem like a great idea, but they can hurt you if you aren’t careful. They usually start at a very low mortgage rate for a specific amount of time (often a couple of years), but after that, the bank is allowed to change the interest rate. If you sell your house or refinance the home into a fixed rate mortgage before the rate changes, you can save yourself a hefty chunk of money.
For a long time, people believed that the housing prices would continue going up forever. One of the biggest problems with variable rate mortgages is if the housing market doesn’t improve, which is exactly what happened a few years ago. Lots of people with variable rate mortgages were suddenly underwater, unable to sell or refinance their homes, and had to watch their interest rates balloon. This left them with huge mortgage payments they couldn’t afford, and many of them had to go into foreclosure. Variable rates can save you money, but they can also be risky.
Term Length
The life of the loan also makes big changes to how much interest you pay. A 15-year mortgage comes with a lower interest rate because you’re agreeing to pay the bank off in a shorter period of time and give them more money each month. A 30-year mortgage, though, your monthly payments are much smaller and more manageable, leaving you with more cash each month and keeping you more secure if something eats into your cashflow. Most people get 30-year mortgages and, sometimes, pay it off early if they get the extra cash.
Other Things to Think About
There are several different minor tweaks you can do to lower your interest rate and get a good mortgage. Putting down a higher down-payment is pretty obvious, but there are others you might not know about. Buying points is another way to lower your interest rate; it’s similar to putting a bigger down payment, in that you’re paying more money now to get a lower interest rate, but one might be more advantageous than the other, so it’s important to run the numbers on both. If you’re an investor, you might want to consider moving into the property and renting out your current home, as most areas offer lower interest rates if it’s owner-occupied for a certain number of months.
Looking carefully at the different options available to you and running the numbers on a variety of scenarios will help you get a mortgage that is a good choice for your goals. A little extra work at the outset can save you thousands of dollars, so choose wisely and put those dollars to a better use.
– Miguel Gross is a blogger for financial sites. With lowering interest rates, find out if it’s time to buy. There are several helpful referral companies such as Turner Symons.
