it\'s time to buy a house! pick a home value and assume that you have 20% of tha
ID: 2797817 • Letter: I
Question
it's time to buy a house! pick a home value and assume that you have 20% of that value to use for a down payment. Investigate and find two mortgage options. Limit your choices to Fixed Rate loans. Post a screenshot and the source for your loan options. Based on the information you find responsible for the monthly payment, how much would you pay in total for your home? Which mortgage option would you chose, and why? What are some pros and cons of each options? For example, I wish to purchase a $300,000 home and have a $60.000 down payment. I decided to explore Weils Fargo to see what mortgage options they offer. I found the following: $240,000 for a loan in Union County, NJ Payment $1,163.00 $1,325.00 S1,716.00 1,045.00 1,256.00 Loan Type 30-Year Fixed Rate 30-Year Fixed-Rate FHA Interest Rate APR 4.226% 4.77890 4.125% 5/1 ARM 3.250% 5/1 ARM FHA 3.500% 3.408% I am going to compare the 30-Year Fixed Rate loan at 4.125% interest and the 15-Year Fixed Rate loan at 3.5% interest.Explanation / Answer
Fixed interest rate Fixed interest rate means repayment of home loans in fixed equal installments over the entire period of the loan. In this case, the interest rate doesn't change with market fluctuations. During the early part of the loan tenure the majority of monthly payments are used to service the interest and the principal is served in the later parts of the tenure. Benefits Interest rate remains fixed irrespective of market conditions A fixed-rate home loan is excellent for those who are good at budgeting and want a fixed monthly repayment schedule, which is easy to budget and doesn't fluctuate It brings a sense of certainty and security Drawbacks The major drawback with fixed interest rates is that they are usually 1-2.5 percentage points higher than the floating rate home loan. Secondly, if for any reason the interest rate decreases, the fixed rate home loan doesn't get the benefit of reduced rates and the borrower has to repay the same amount every time. Another area of concern is whether the fixed rate home loan is fixed for the entire tenure or only for a few years. This has to be cross-checked with the bank while taking the home loan. A fixed home loan, which can be changed every few years, will definitely wipe out the very spirit of such a loan. Experts agree on the fact fixed rates are a better option if the economic scenario promises a rise in interest rates in the near future. Floating interest rate Floating interest rate by name implies that the rate of interest varies with market conditions. Home loans on floating interest rates are tied to a base rate plus a floating element thereof. So, if the base rate varies the floating interest rate also varies. Benefits The biggest benefit with floating rate home loans is that they are cheaper than fixed interest rates. So, if you are getting a floating interest rate of 11.5 per cent while the fixed loan is being offered at 14 per cent, you still save money if the floating interest rate rises by up to 2.5 percentage points. Even if the floating rate goes over the fixed rate, it will be for some period of the loan and not the entire tenure. The interest rates will surely fall over a long period and, thus, the floating interest rate brings a lot of savings. Drawbacks The drawback with floating interest rates is the uneven nature of monthly installments. This makes it difficult to budget with floating interest rate home loans. As seen in recent times, due to the hike in floating home loan interest rates, the borrowers had to shell out thousands per month extra as their EMIs, throwing their entire budget out of order.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.