If you have decided to refinance your mortgage, one of the first things you need to decide on is how much you will pay in interest each month. Before deciding on a monthly fixed rate mortgage payment, you should understand how mortgage refinancing works and how your current interest rates compare to mortgage rates offered by lenders. Your interest rates are determined by your FICO score, your credit rating, your debt-to-income ratio, your down payment, the amount you wish to borrow, the type of loan you intend to take out, and the term of the loan. If you have any bad credit or no history at all, you may find that your interest rates are higher than someone who has good credit but a bad FICO score or who has bad credit and a long-lasting history. You can learn more about refinancing your mortgage through an online mortgage guidebook.
The type of mortgage you choose depends on whether you want a fixed-rate or a variable-rate mortgage. With a fixed-rate mortgage, you pay the same amount every month for the entire life of the loan. With a variable-rate mortgage, your interest rates can change over time. To keep your payments the same every month, you can choose a term that runs for a longer period of time, up to 35 years, or you can choose to make extra interest-free payments every so often. You can use a mortgage calculator for additional information about interest-only mortgages, option mortgages, and conventional mortgages with negative amortization.
A popular choice for borrowers who need to make a larger mortgage payment every month is a balloon mortgage. This type of mortgage offers adjustable interest rates that gradually rise over time. With a balloon mortgage, your payment includes interest, as well as fees and other charges, for the first few years. After the initial period of time, the lender will reset the interest rate and adjust your payment to a lower amount. If you stay with the original terms, you will pay off your loan early and avoid paying extra money over the long run.
The advantage of a balloon mortgage is that it allows borrowers to plan ahead for their financial future. In the event of a balloon mortgage’s failure, you will have the money in hand to pay off the remaining debt. This gives borrowers the opportunity to reorganize their finances and get out from under the debt that was incurred during the introductory period. However, because of the initial high interest rates, many people choose to refinance after only a few years. This means that the remaining balance will be due at much higher rates, with only a slight decrease in payments.
Many homeowners mistakenly think that a balloon mortgage is a great option for them because they have the luxury of choosing a monthly fixed rate mortgage payment amount. Unfortunately, many people end up making these types of payments, even when the interest rates have fallen. Instead of reducing the principal amount, homeowners opt to refinance to a fixed rate mortgage.
One of the advantages of choosing a fixed rate mortgage is that you will know ahead of time the rate you are going to pay. With a variable rate mortgage, you will only know when your payment will be higher or lower. This makes it very difficult to budget for repayment. If you change lenders because of this issue, you can end up in a vicious cycle of borrowing and repayment, where you have borrowed more than you can afford to repay, yet are still struggling to make the payments. Choosing a fixed rate mortgage allows you to know ahead of time the payment amount, so you will not be caught off guard.
One of the disadvantages of choosing a monthly fixed rate mortgage is that it does not give you the flexibility you would like. You cannot go around adjusting your mortgage rates whenever you want to. If your costs or expenses rise suddenly, you are stuck with whatever rate you got when you took out the loan. It may seem like an inconvenient way to budget, but it can be quite effective at times. When emergencies come up, it’s comforting to know that you will always have a set monthly amount to pay.
A monthly fixed rate mortgage is a good choice for homeowners who want a plan for repaying their mortgage. It gives them a sense of security, since they can’t go to borrow money to meet unexpected expenses. But there are some disadvantages to a monthly fixed rate mortgage as well. Before taking out a loan, you should carefully consider all of its pros and cons.