Owning a home is a dream come true and a rite of passage for many people. It provides total creative freedom over your space and allows you to shape your surroundings completely and create a private oasis for yourself and your family.
Homeownership also provides the opportunity to establish yourself as part of a community and make a long-term commitment to staying in one place. From a financial point of view, buying a home is also a good idea and can serve as a powerful tool for the future wellbeing of your economic situation.
1. Step one
For most people, the first step to unlocking all these potential benefits is through a mortgage, which at its most basic, can be explained as a loan used to purchase a home. Of course, it is a bit more complicated than that though, so here are some guiding principles to explain how it works.
2. Pros of fixed-rate mortgages
In the marketplace of mortgages, there are two basic types, fixed-rate and variable-rate. A fixed-rate mortgage is the more predictable option, as it is a loan that charges a set rate of interest that does not change at all throughout the entire lifespan of the loan. This is the more traditional route and is likely what most people have in mind when it comes to buying a home.
The reason this type of mortgage remains popular is because it enables buyers to spread costs out over a longer time by making smaller, and completely predictable payments. Due to the stable status of the interest rate, buyers will not suffer due to any sudden or potentially significant increases in monthly payments if rates go up.
3. If stability is important
Similarly, the stability offered by this type of mortgage makes them easier to understand and can allow the buyer to largely anticipate how agreeing to such an arrangement will impact their finances. That being said, most fixed-rate mortgages do allow borrowers to make extra payments in order to shorten the term of the loan or even to make additional lump-sum payments to retire the loan early without incurring any penalties as a result.
4. Cons of fixed-rate mortgages
Although fixed-rate are definitely the most popular option for a reason, there are circumstances that arise which might not make them the best choice for everyone. Due to the fact that the payments are less affordable than other loans, fixed-rate mortgages can be harder to quality for. Especially when interest rates are high, some people might find it challenging to get the quantity of money they require to buy the home they want.
5. Pros variable-rate mortgage
On the other hand, a variable-rate mortgage is a loan in which the rate of interest is subject to change over the course of the time the money is being borrowed. When these shifts occur, the monthly payment is accordingly adjusted to account for the change.
Due to the increase in home prices, variable rate mortgages have become a lot more popular as many eager buyers are being forced out of the market. As a result of the fact that payments are more affordable, variable-rate mortgages are generally easier to apply for. They also provide borrowers with more flexibly, meaning they can choose terms that require a lower initial payment and can be spread over periods that last anywhere from one month to one year.
6. Cons variable-rate mortgages
As the name suggests, the biggest risk for a homebuyer opting for a variable-rate could be the payment shock. This happens when interest rates increase, and the borrower cold be facing a sudden and sizable increase in monthly payments. Due to the fact that variable-rate mortgages are also more complex, they can be more challenging to understand and can result in surprising outcomes.