If your New Year’s Resolution was to purchase a new home this year, then congratulations! That’s a huge step to take in life, and, depending on the state of your current home, could mean a step up to a better fit for you and your family.
At Iowa State Bank, we like to make the mortgage part of this process as easy as possible, so we’re offering up some pros and cons of the various loan types out there. Hopefully they’ll give you a head start in your home buying process!
Fixed-rate mortgages- your interest rate stays the same through the life of your loan.
- 30-year: pros- borrow money long-term without change in interest rate, lower monthly payments because amortization is spread out, higher interest bill reduces tax bill; cons- builds equity slowly, higher interest rates, more interest paid over the life of the loan.
- 15-year: build equity quicker, pay less interest over life of the loan, lower interest rates; cons- higher monthly payments than 30-year, restricts you to smaller homes you may be able to afford with a long-term loan.
Adjustable-rate mortgages- interest rate and monthly payment fluctuate with market changes. Pros- initial interest rate is lower and stays the same for a certain period of time. Cons- the risk of higher interest rates after initial rate period ends.
- Popular ARM types: 1/1, 3/1, 5/1, 7/1, 10/1- the first number refers to the number of years the initial interest rate stays constant.
Other loan types
- Jumbo- mortgages higher than the limits set by Freddie Mac and Fannie Mae. Pro- can buy larger, more expensive home. Con- higher interest rate to offset the risk inherited by the lender.
- Balloon- Borrowers get lower rates and payments for a specific period of time, usually three to 10 years. At that point, a borrower has to pay off the principal balance in a lump sum. Pro- save on initial mortgage costs. Cons- changing plans can leave you having to pay a lump sum or refinance it.
We hope these pros and cons help you to begin your planning for your mortgage and the home buying process. If you have any questions about how Iowa State Bank can help with your mortgage needs, just contact your nearest office today!