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Most people dream of owning a home irrespective of the substantial purchase price. One of the most convenient ways of becoming a homeowner is through mortgage financing. A mortgage makes a home affordable since one pays back the loan over a long period. However, a mortgage involves incurring a huge debt. So, what are the pros and cons of mortgage financing?
Pros of Mortgage
Cost-Effective Borrowing
A mortgage is a cost-effective financial product. Typically, the cost of borrowing depends on the interest rates. In comparison with other forms of loans, mortgages attract lower interest rates. Most financial lenders prefer to charge lower interest rates on mortgages since the repayment duration is extended. As a result, the monthly repayments are more affordable due to the long mortgage repayment period. Also, the low interest rates mean that homeowners can budget appropriately for the payments. Moreover, mortgage expenses qualify for tax deductions.
Long-Term Repayment Period
One of the primary considerations when selecting loan financing is the duration of repayment. Typically, there are two major types of loans based on the repayment period. Although the mortgage requires one to commit to long-term debt, it does make a home more affordable. As such, one can manage to purchase a dream house despite not paying in cash. In addition, the extended repayment period allows one to plan for repayment while meeting other financial obligations.
The Choice Between Fixed and Adjustable Interests
A person applying for mortgage financing has a choice between fixed and adjustable interest rate loans. Essentially, an adjustable-rate mortgage means that the interest rate applicable keeps on changing throughout the life of the loan. Usually, adjustable-rate mortgages attract a lower interest rate compared to fixed-rate mortgages. Conversely, the interest for a fixed-rate mortgage does not vary over time. In this way, the payable interest is more predictable, which makes planning and budgeting easier. More so, applying for a fixed-rate mortgage helps you to counter the effects of rising inflation. Thus, the interest rates will remain the same over the life of the loan despite an increase in inflation.
You Access the House Immediately
A mortgage lets you enjoy homeownership as you repay the loan. When you purchase a home on a mortgage, you gain access to the house immediately. Thus, you can move into the house, which will save you a significant amount of rent. Besides, you may use the rent as part of the monthly mortgage repayments while paying to own the house. More so, you may decide to rent out the house and get a steady rental income. In comparison, you cannot move into a home without full payment should you opt for a cash home purchase.
Cons of Mortgage
Essentially, a mortgage is a long-term debt, meaning you pay a lot more in the long run. Thus, one should apply for an affordable mortgage to avoid being caught in a debt cycle. Then, a mortgage is a secured loan against the property. Therefore, there is a risk of home repossession should you default on payments. Fortunately, you can negotiate with the lenders for loan restructuring and also consider mortgage refinancing options.
Ultimately, there are different types of mortgages in the market. Ensure you weigh the pros and cons and find a product that better suits your needs.
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