Pros and Cons of Switching Home Loans

30 year vs 15 year home loansThere are two different types of home loans: fixed and variable rate, and there are both pros and cons to each type. In addition, there are advantages and disadvantages to switching from one type of mortgage to another, or refinancing your mortgage. Read on to learn more about the different types of mortgages and what to consider when thinking about switching home loans.

Many home-buyers believe the fixed mortgage is preferable. This is because the payments and interest rates will remain the same: they do not fluctuate with the housing market. Advantages of getting a fixed rate mortgage include the security of knowing exactly what your payment is going to be. Also, you can choose between a fixed mortgage of 15 years or 30 years.

While the payments will be lower on the 30-year mortgage, for a number of years you will primarily be paying interest, which means it will take longer to build equity. A 15-year mortgage has higher payments, of course, but builds equity more quickly. Homeowners can refinance their fixed rate mortgage to change these terms as their financial needs change.

An adjustable rate mortgage is one with monthly rates and payments that fluctuate along with the changes in the housing market. Some first-time home-buyers go with an adjustable rate mortgage, or ARM, because they are easier to obtain if you have less than stellar credit. However, you may find when housing rates drop and your credit has improved it is a good time to switch to a fixed home loan.

One thing to do when considering switching home loans is to make a thorough analysis of your finances. By creating a monthly spending plan, or budget, you can see the exact amount of money you have, where it goes, and where improvements can be made. The first step is to list all your income. Then, list every expense you have. This includes the big things like your mortgage, utilities, food and insurance – but don’t forget the smaller things either like clothing, entertainment or your regular stop at the coffee shop.

Once you have an accurate picture of your finances, you can see whether you have money left over at the end of the month or not. If you are not satisfied with the amount left over, or spend more than you make, cutbacks can be made in non-essential areas. In some cases changing your home loan can be a viable solution.

For example, you could switch to a fixed rate 30-year mortgage if rates were low, thus lowering your monthly payment and giving you more in your pocket each month. Or, if you have excess income, you could change to a 15-year mortgage and build equity more quickly. Some homeowners choose to go from a fixed rate mortgage to an adjustable rate mortgage if the rates are appealing enough. A mortgage loan specialist at your bank or home loan company can walk you through the details and explain more of the advantages and disadvantages of each choice.