A mortgage is a loan you take out from a financial institution to purchase a home or other type of real estate. When you take out a mortgage, you agree to repay over a specific period of time.
Fixed Rate Mortgage Vs Variable Rate Mortgage
A fixed rate mortgage is a home loan with an interest rate that remains the same over the entire term of the loan, regardless of how the economy is performing and the lending rate. The main advantage of a fixed rate mortgage is that you’ll know how much your mortgage will cost every month. This gives you certainty and peace of mind knowing that an increase in interest rates won’t affect you. However, interest rates for fixed rate mortgages tend to be higher compared to variable rate mortgages. Besides, you won’t benefit if interest rates go down in the future. For someone with a fixed income, a fixed rate mortgage can be a good option.
A variable rate mortgage, as its name implies, is a home loan with an interest rate that varies based on market interest rates, prevailing economic conditions, and other factors. This type of mortgage is ideal for borrowers who want to pay a lower interest and enjoy the flexibility of making extra repayments without penalties.
Variable rate mortgages have a lower interest rate and the initial monthly payments are usually lower. Unlike with fixed rate mortgages, you can save money if interest rates go down. However, variable rate mortgages can become more expensive if interest rates increase.
Common Mortgage Mistakes Home Buyers Should Avoid
- Not shopping around to find the best mortgage lender
- Underestimating the cost of homeownership
- Accepting the first mortgage offer you get
- Not getting a mortgage preapproval to determine how much you can qualify for
- Applying for a mortgage without learning about the whole mortgage process
- Not hiring an experienced mortgage broker
- Assuming all mortgages are the same
- Not putting down enough down payment
- Adding too much credit card debt
A mortgage is a loan that you’ll repay over a long period of time, so you’ll have to find ways to reduce the cost of the mortgage and save money.
Here are tips that will help you save money when applying for a mortgage:
- Put down at least a 20% down payment to reduce monthly mortgage payments and avoid paying mortgage insurance.
- Get a mortgage pre-approval to establish your credibility as a home buyer
- Compare different mortgage lenders to find the best deal
- Improve your credit score to get lower interest rates
- Pay down your existing debt
How to Choose the Best Mortgage for You
Choosing the right mortgage product can be an overwhelming task for first-time home buyers. If you choose the wrong mortgage, you may set yourself up for serious financial problems in the future. It is important to assess your financial situation and consider the loan options available to you. It’s also a good idea to compare lenders before settling on the best lender and ensure you understand loan costs and fees to avoid surprises down the road.