Mortgage is needed to purchase a home unless you have ALL-CASH! What is the best mortgage? A 30-Year Fixed Loan vs. 7-Year Fixed Loan A 30-year fixed rate loan in real estate is a loan your bank gives you and you agreed to repay the principal and interest on the money you borrowed equally over a 360 months payment schedule. This contrast to a 7-year fixed loan, which is also known as an ARM or adjustable rate mortgage your interest rate and monthly payment stay the same but only for a shorter period or 7 years. What happens at the end of the 7 years is dependent upon what interest rates have done for the past 7 years. If interest rates have adjusted down then you ARM loan does too. It interest rates have gone up, your future interest rate will adjust with a higher interest rate.
What is an index?
What determines your new rate is what your loan documents state that you signed when you purchased your home initially. Usually the interest rate is tied to the one-year Treasury Bills (T-Bills) index. Some loans are tied to the LIBOR index. The T-Bill index moves slowly to the market rising slower and coming back down slower because the LIBOR index reacts quickly where at times it may seem to instantaneously. Sometime both indexes will limit the amount loan payment can adjust. Usually it is around 2% or so. One last note when buying a 7-year Fixed Rate Loan read it to make sure there is a cap to how high the loan could go. In the past, the most cap for loans were 5% over the note rate. This figure could change with the next inevitable increase in rates.
And I want this mortgage because?…
So why would anyone in there right mind want to buy a 7-year Fixed Rate Loan when they buy their new home? There are two, which take the most consideration. One, 7-year fixed rate loans tend to have a lower interest rate than it counter part 30-year fixed rate loan. This means you can qualify for a higher priced home and maybe buy in a neighborhood more desirable to you. Secondly, if you are planning to move for any reason such as job transfer, going to have need for more room for
any reason, or just want to move from one side of the tracks to the other a 7-year fixed rate loans is a good idea.
As for the 30-year fixed rate loan be sure to check out in your note for a prepayment penalty clause as that could add to your future expenses that would be over and beyond the normal interest and closing costs.
30-Year Fixed Loan vs. 7-Year Fixed Loan
What should I do now?
If you would like to know more about what your real estate financing options are for you please feel free to contact me. My contact information listed in the boxes below. Sign up for my Free Newsletter on the right side if you would like to receive more helpful information in the future. You may also search for any homes in the Greater Bay Area by using the “Quick Search” in the top right hand corner. Be sure to use the drop down arrow so you select your desired city.
Please comment below about what you think about these two types of loan products. A thumbs up or down would be a great second choice for you too. Thank you.[Tweet “What is the best mortgage? A 30-Year or a 7-Year Fixed Loan”]
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