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How Do I Choose A Mortgage?

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Contributor:
Paul Ambrose
Paul Ambrose

The biggest question most homeowners will face this year is whether to choose a fixed-rate or variable-rate loan. 

Briefly, a fixed-rate rate mortgage will have the same interest rate over the life of the loan while a variable-rate loans will go up and down based on the interest rates banks are charging people at the time. 

To a certain extent, choosing the “right” mortgage depends on your ability to predict the future.  Each one has its own pros and cons, as explained below:

Fixed-rate

A fixed rate loan offers you the advantage of knowing exactly how much you’ll be required to pay each month for the next 25 or 30 years.  If you know you’ll be barely making enough to pay that amount, a fixed-rate loan would be better for you.  More so now with many going into foreclosure, one has to consider all factors before deciding what kind of loans to get.

Hundreds of homeowners in foreclosure across the country can testify to the trap of getting a variable-rate loan when interest rates were low, then being unable to make the payments when they rise.  

Variable-rate

The big advantage to variable-rate loans is what happens if interest rates fall:  your interest rate falls too, taking with it huge sums of cash you would otherwise have had to pay.  Many variable-rate loans are also more flexible when it comes to repayment, allowing early repayment without any penalties.  So, something else to consider when choosing one type or the other is whether you think you will have occasion to pay off a large sum of the loan at any point in the next few years.  If so, a loan with no repayment penalties would definitely be the right choice for you.  

A second choice not so many people will face, but one worth mentioning, is a revolving credit mortgage versus a traditional one. 

A revolving credit mortgage is kind of hard to wrap your head around, but basically it goes like this:  you take out a loan for the amount, and you can pay it back whenever you like, but the bank charges you interest each month based on the average loan balance. 

You can make this work for you by putting money into the account as soon as you get it and paying bills as late as possible in the month, or it can work against you if you don’t have the discipline to pay the mortgage off over time.  

A couple questions to ask yourself if you’re considering a revolving credit mortgage:

  • Do I pay off my credit card in full each month?
  • Are you able to save some each month?  

If the answer to the above questions is yes, a revolving credit mortgage might work to your advantage.  If not, you’d probably be better off with a traditional mortgage.  

A final word of advice:  If you’re still unsure of one type or the other, most banks will offer combinations of fixed-rate and variable-rate mortgages, or traditional and revolving credit mortgages.  Ask around!  

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