Different Types of Mortgages – Which One Is Right For You?
When it comes time to purchase your first home, one of the first things you need to decide is what type of mortgage you want. It’s a big decision, but it can make all the difference in your long-term financial situation.
There are many different types of mortgages available to you, including fixed-rate and adjustable rate mortgages (ARMs). Knowing what’s right for you is important.
Variable Rate Mortgage
A variable rate mortgage is a home loan with an interest rate that fluctuates according to the prime interest rate, which is set by your lender. Variable-rate mortgages are a popular choice for many people because the interest rate starts out lower than that of a fixed-rate mortgage and is adjusted periodically to reflect market changes. However, it is important to remember that variable-rate mortgages carry more risk than fixed-rate mortgages.
A major concern with variable-rate mortgages is the potential for an increase in monthly payments if the prime rate goes up dramatically. This can impact your budget, making it difficult to make ends meet if youre a first-time homebuyer or dont have a lot of savings saved up.
Another drawback of variable-rate mortgages is that if you decide to switch to a fixed-rate mortgage later on, it may cost you a significant amount of money in break penalties. Some lenders charge as much as three months of interest in case you switch to a fixed-rate mortgage, which could add up quickly and put your budget at risk.
As mentioned above, a variable-rate mortgage is not the right option for most homeowners. These mortgages are best suited to homebuyers who expect to remain in a particular home for several years, or who anticipate paying off their mortgage before the interest rate adjustment period ends. They also require the ability to make a higher mortgage payment if the interest rate increases during the term of the mortgage.
If youre thinking about purchasing a new home, talk to your BMO mortgage specialist to learn more about the different types of mortgages available to you. They can help you make the right decision based on your needs, lifestyle and current mortgage conditions.
The decision to choose a variable or a fixed mortgage comes down to your individual risk appetite. If youre worried about rising rates and are concerned about your long-term financial stability, a fixed mortgage will be the better option for you.
For the same reason, if you have a strong credit history and plan to stay in your home for a few years or pay off your mortgage before your interest-rate adjustment period begins, then a variable-rate mortgage is the better option for you. These types of mortgages are also a good option for borrowers who are confident about the future and want to capitalize on the lower variable rates.
CIBC offers a variety of variable-rate mortgage options to suit your needs. The CIBC Variable Flex Mortgage(r) lets you convert to a 3 year or greater fixed rate closed mortgage at any time without a prepayment charge.
A variable-rate mortgage is a type of home loan that has an introductory interest rate and then fluctuates based on the CIBC Prime rate over the life of your mortgage. As the CIBC Prime rate increases, your mortgage payments will increase as well.
Fixed Rate Mortgage
The fixed rate mortgage, or FRM, is a popular type of home loan that offers many benefits. Its major advantage is that it enables you to lock in your interest rate and payments for the life of your loan, no matter how much the market changes.
There are several types of fixed-rate mortgages, each with its own set of advantages and disadvantages. The best choice for you depends on how much you want to pay and how long you plan to stay in your new home.
Typically, a 30-year mortgage is the most common option for fixed-rate loans. Some lenders also offer 20-year and 10-year options, depending on your financial situation.
A fixed-rate mortgage is an excellent option if you’re looking for a loan that won’t change over time, which is important when you’re budgeting and planning your financial future. Additionally, fixed-rate mortgages are a great option for lower-risk borrowers, who tend to qualify for longer loan terms than higher-risk borrowers.
Another key benefit of a fixed-rate mortgage is that it’s fully amortizing, meaning that the loan will be repaid to zero after all of the monthly payments are made. Part of each payment goes to paying off interest charges, and the other part goes toward repaying principal.
As a result, you won’t have to worry about how your payments will fluctuate as property taxes or homeowners insurance change. This makes it easier to budget your finances and stay within your monthly income limit.
However, a fixed-rate mortgage may cost you more in the early years than an adjustable-rate mortgage. This is because there’s no lower introductory rate like you get with an ARM.
There’s also a higher risk for lenders when borrowers choose a fixed-rate loan. That’s because a lender isn’t able to capitalize on rising interest rates like they would in a variable-rate loan.
In addition, a fixed-rate mortgage is harder to qualify for than an ARM. This is because fixed-rate mortgages require you to meet slightly stricter credit standards, which can mean a higher debt-to-income (DTI) ratio and a higher credit score.
This can make it difficult to secure a mortgage if you’re a first-time buyer. Talk to one of our licensed mortgage loan officers to find out what kind of loan might work best for you and your situation.
If you’re ready to take the next step toward homeownership, we can help you with every step of the process. We’ll match you with a highly rated lender in minutes, so enter your ZIP code today to start a personalized search!
Interest Only Mortgage
An interest-only mortgage is a type of home loan that allows you to pay only the interest on your home during a certain period. These loans are often more difficult to get than conventional mortgages, but they may be right for some people.
The best way to determine whether an interest-only mortgage is the right type of mortgage for you is to understand the pros and cons of this option. This is especially true if you’re considering this mortgage to purchase an investment property or a second residence that won’t be your primary home.
In addition, if you’re looking to make a major upgrade to your home in the near future, this type of mortgage could be the best fit for you because it can be hard to afford higher payments on a principal-plus-interest mortgage after you’ve been in your home for some time.
These loans typically have low monthly payments for their initial term periods, but once they end, your monthly payment will increase significantly. This can be a big problem for anyone who doesn’t have a lot of extra money to spare.
This type of loan is only a good option for people who can afford to make the higher monthly payments. Those who don’t can probably find better financing elsewhere.
A lot of homeowners who used this type of mortgage during the bubble years of the 2000s defaulted on their loans, which led to foreclosures and a crash in the housing market. The financial crisis of 2007 and 2008 shook the entire economy, and many homeowners who bought expensive houses with an interest-only mortgage couldn’t afford to pay off their debt or refinance into a traditional loan.
It doesn’t build equity in your home: This is the most important aspect of any mortgage, and it takes a long time to build up your home’s equity. An interest-only mortgage doesn’t help you build up equity, so it’s not a good choice for anyone who wants to sell their home in the future or use the equity to make improvements to the house.
You may lose your existing equity: The amount you owe on your mortgage is the sum of your total outstanding balance and the amount of your down payment, so if your home’s value declines during this time, you won’t have any equity to fall back on. This can make it harder for you to refinance or sell your home, which can make it difficult to recoup the total cost of your loan.
Adjustable mortgage rates: Most interest-only mortgages are structured as adjustable rate mortgages, which means they will likely start lower than fixed rate mortgages and can be subject to changes in the market. These mortgages are riskier than a traditional fixed-rate mortgage because the interest rate may rise later on, which could cause your monthly payments to increase.
