Before you put a down payment on that chic new townhouse, spend some time learning the ins and outs of mortgages. Simply put, a mortgage is a loan used to purchase real estate. The two biggest mortgage decisions you will make are the type of mortgage, and the mortgage term. Making the right choice for both will help to keep you financially stable as you enjoy the home of your dreams.
Term vs. Maturity
A mortgage term is the length of time used to calculate your payments. As it applies to mortgages, the term “maturity” indicates the date the final payment is due. Although both dates are usually the same, there are cases in which they might be different. If you take out a mortgage with a 30-year term, your monthly payments are calculated by amortizing the loan over 360 months. Balloon mortgages generally calculate payments over a 30-year term but have a maturity date (when a balloon payment is due) of three to 10 years. In most cases, homeowners simply refinance, or sell the home, to make the balloon payment.
Common Mortgage Terms
Although you can shop for mortgage terms in five-year increments ranging from 15 to 40 years, 15- and 30-year terms are the most common for fixed mortgages, according to MSN Money. Adjustable rate mortgages (ARMs) almost always come with a 15- or 30-year term. Some buyers choose hybrid mortgages that offer a term with a fixed-interest rate for a period of time, before converting to a term with an adjustable-rate. These hybrids give someone just starting out in his career financial stability in the form of fixed payments early on, before converting to a riskier mortgage where monthly payments fluctuate along with the market.
Common Terms for Uncommon Mortgages
Some mortgages carry terms that are very different from the usual 15 to 30 years, but are typical for that particular type of mortgage. The Federal Reserve Board describes interest-only mortgages. With these mortgages, you pay only interest on the loan for a term of three to 10 years before it reverts to a conventional fixed-rate term of 20 to 27 years, when you pay on both the principal and interest.
Shorten Your Mortgage Payoff
Although you may have signed onto a 30-year mortgage, there are several ways you can pay off the mortgage earlier without changing the actual terms. Making an additional payment towards the principal balance each month, or making one additional lump-sum payment per year, can go a long way towards paying off your loan and saves you thousands of dollars in interest.
When mortgage shopping, think ahead. Many families who are financially stable, and who plan to be in their home for the long term, go with a 30-year fixed rate mortgage. If you expect to relocate, expand your family or have a drastically changed financial situation in the next five, 10 or 20 years, you will want to take a closer look at the different mortgages available. Work through how different mortgage terms will best fit your particular situation.
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