How Does Economic Downtown Affect a Borrower’s Fixed-Rate Mortgage?
Most home buyers use a mortgage to purchase a home. For those who have owned a home before, the process may be a bit easier, but first-time buyers often lack important information about mortgages.
For example, it is important to know the difference between a fixed-rate mortgage and adjustable-rate mortgage, to know when you need a mortgage, and to know why to create a budget before taking out a mortgage. Read on to learn more about these essential topics.
People Most Likely Need to Take Out a Mortgage When They…
Why do people take out mortgages? Well, they are most likely to take out a mortgage when they are making a large purchase, like a home. Most people cannot afford to pay for a house outright, which is why they take out a mortgage. Essentially, a mortgage is a loan that is used to purchase or refinance a home. If you do not have the cash to purchase a home upfront, then you can take out a mortgage as a loan to buy it, and then pay the mortgage back over time.
Sometimes, you may even take out a mortgage even if you have the money to buy it upfront. Many investors choose to take out a mortgage on properties so that they still have the capital to invest elsewhere.
Those who take out a mortgage will need to meet certain criteria. For example, you must have a debt-to-income ratio below 50% and also have a high enough credit score. The mortgage lender used your current market rates and your level of risk to determine your interest rate. Lastly, there are two types of mortgages, fixed-rate and adjustable-rate. In the next section, we will explore these two mortgage options.
What Impact Might an Economic Downturn Have on a Borrower’s Fixed-Rate Mortgage?
As you might concur based on the name, a fixed-rate mortgage has a stable interest rate that stays the same for the entire duration of the loan. On the other hand, adjustable-rate mortgages will start out with low, fixed rates but the rates can fluctuate for the rest of the loan term.
So what happens when the economy changes? Will the economic downturn impact your mortgage? If you have a fixed-rate mortgage, then the economy will have no impact on your mortgage because the mortgage rate is locked in. On the other hand, the economy will greatly affect an adjustable-rate mortgage, leading to a big payment shock if the rate goes up.
Many People Prefer a Fixed-Rate Mortgage Because It…
Adjustable-rate mortgages are flexible and can offer savings in the short and medium-term, but most people choose a fixed-rate mortgage. In fact, 60% of people choose a fixed-rate mortgage. Why do so many people prefer a fixed-rate mortgage? Because they are predictable. With an adjustable rate mortgage, you can never be positive about what you will pay each year, or even over the long term. On the other hand, a fixed-rate mortgage offers stability. When you choose a fixed-rate mortgage, you know exactly what you will pay and you will not experience payment shock. This makes it easier for you to plan your financial future.
What Is the Best Reason for Homebuyers to Create a Budget Before Taking Out a Mortgage?
Taking out a mortgage is a serious decision that requires you to plan. You should never take out a mortgage without ensuring you have enough money to do so. The number one reason homebuyers should create a budget before taking out a mortgage is so that they can accurately plan how to pay off the borrowed money.
Waiting to budget until after you have your mortgage is incredibly risky. Once you have already taken out the mortgage, it will be hard to adjust your finances. Instead, you should plan your budget , before you take out a mortgage. By budgeting first, you will know that you can pay off the mortgage, and be able to assess the size of a mortgage that is reasonable for you. This way, you can always ensure you have backup savings to cover your mortgage if any unforeseen events occur.
Understanding the basics about mortgages will help you in your home buying process. It is always important to apply for a mortgage that you can reasonably afford and to budget before you take out the mortgage. The type of mortgage that is best suited for you will depend greatly on your financial situation and personal circumstances. For more information on mortgages and other home-buying terminology, we can help. Check out our blog for more information or contact us today HERE.
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