“What type of Austin home loan should I get?”
It’s one of the most frequently asked questions among home buyers in Austin — especially first time buyers who are applying for their first mortgage loan. And for good reason. Choosing your Austin home loan is one of the biggest financial decisions you’ll ever make, so it’s crucial that you understand the different types of Austin home loans available to you.
In truth, choosing the best type of Austin mortgage loan for your home buying situation is pretty straightforward. Once you understand the advantages and disadvantages of each mortgage loan type, it’s only a matter of aligning your financial situation with the best type of Austin home mortgage loan.
This article will help you do the kind of thinking necessary to choose the best type of home loan for your unique situation.
What is a Home Mortgage Loan?
Let’s kick off this discussion with a basic mortgage definition, just so we are on the same page. Of all the definitions I’ve seen of a home mortgage loan, the one I found most helpful was in a book called Home Buying for Dummies, by Eric Tyson and Ray Brown.
In their book, the authors explain that “a mortgage is nothing more than a loan that you obtain to close the gap between the cash you have for a down payment and the purchase price of the home…”
You are buying a home in Austin, and you have a certain amount of money to put toward that home. But unless you’ve just won the lottery, you probably don’t have the full amount of the home. Your Austin home loan will cover the distance between your down payment and the home’s total cost.
It’s important to start thinking in these “distance” terms, because a lot can happen to the economy during the life (or “term”) of your Austin mortgage loan. How much these factors affect your mortgage depends on the type of mortgage loan you choose. Aha! Now it all starts to come together.
The Major Types of Austin Home Loans
The biggest difference between Austin home mortgage loans has to do with their interest rates — namely, whether the rate is fixed or variable.
- With a fixed-rate mortgage loan, your interest rate will never change, no matter how long you have the loan or what the economy does in that time.
- On the other hand, an adjustable-rate mortgage loan (ARM) will have an interest rate that adjusts or resets periodically during the life of the loan.
There are many different types of Austin home loans available to the average home buyer. But to a certain extent, they can all be classified as either fixed-rate or adjustable-rate. So it’s important that you understand the differences between these two types of Austin home loans, with a particular focus on the pros and cons of each type of loan.
Fixed-Rate Mortgage Loan ~ Pros & Cons
As you would guess by its name, a fixed-rate mortgage is a mortgage loan where the interest rate holds steady for the life of the loan. No matter what national interest rate trends do, the rate on a fixed-rate mortgage will stay the same. By extension, the monthly mortgage payment stays the same from month to month, and year to year.
This certainty is the number-one benefit of an Austin mortgage loan with a fixed rate. You always know what your interest rate will be, regardless of what the economy does.
So that’s the upside. But what about the downside of a fixed-rate mortgage. Generally speaking, you will pay a certain premium for the predictability of a fixed-rate loan, and it comes in the form of a higher interest rate.
When an Austin mortgage lender gives you a fixed-rate home loan for a long period of time (like 30 or 40 years), the mortgage lender takes on a certain amount of risk. If the prime interest rate increases during the term of your loan, you will not have to pay the difference (if you’ve chosen a fixed rate), but the lender will have to pay it. This is why Austin mortgage lenders will normally charge a higher interest rate on a fixed-rate loan than they would with an adjustable-rate mortgage (next topic).
Adjustable-Rate Mortgage (ARM) Loan ~ Pros & Cons
These days, most ARM loans begin with a fixed interest rate for some initial period of time, usually 3, 5 or 7 years. During this introductory period, the interstate rate is fixed and will not change. But after the preliminary phase, the loan converts to an adjustable-rate mortgage loan.
Generally speaking, the interest rate on an adjustable-rate mortgage / ARM will be lower than the rate on a traditional fixed-rate mortgage — at least initially. The catch, of course, is that you cannot predict what the prime interest rate will do after your mortgage loan’s introductory period. So in this regard, you can think of the initial period as a reward for the uncertainty of the adjustable period. You will start off with a lower interest rate than a regular fixed-rate loan, but you then have the uncertainty of the adjustment phase.
After your ARM loan adjusts (or “resets”), your monthly payments will rise and fall with average interest rates. It would be great if they fell, but bad if they rose. The important thing to remember is that you’ll have no way to predict the average interest rates in advance, so the adjustable nature of the loan is something of a gamble.
This is what you hear a lot about on the news right now, in Austin and elsewhere in the country. Many people have ARM loans that are adjusting, and the new mortgage amount is beyond their ability to pay. This is partly responsible for the current mortgage foreclosure crisis going on in the U.S.
Conclusion
I hope this guide to the two main types of Austin home loans helps you pick the loan that’s best for you. Remember, if you’re going to be in the home for a long time (five years of longer), then a fixed-rate mortgage is probably best for you. If you will only be in the home for a few years, then you might opt for an adjustable-rate mortgage to save money in the short term (and sell the home before the adjustment period).
Of course, the final choice is up to you. But hopefully this article has given you some things to think about. Good luck with your Austin home buying process!
