A 5 year fixed rate mortgage is appealing to many new homeowners and remortgage candidates at first glance. The interest rates offered cant be rivaled by most long term fixed rate loans or variable rate loans. However, in the long run you may not be able to afford a fixed rate loan with a 5 year introductory period. This loan can save you a lot of money up front, but may not be able to maximize your mortgage savings over the span of the total 25 year loan. If you are asking yourself if you can afford to take out a 5 year fixed rate mortgage, here are some things to consider.
Short Term Payments
Its easy to calculate your mortgage payment for the first 5 years. You will know exactly what your fixed rate mortgage percentage will be, and this means that your mortgage payment will be consistent. If you can afford the initial payment quite easily, provided that your finances dont change drastically over the next five years you can be confident that you will be able to pay the mortgage payment. Even with fixed payments, however, if you lose your job or your finances drastically change even a reasonable fixed rate payment may become out of reach.
Five Year Uncertainty
Beyond the initial five year period, there is less certainly about whether or not you will be able to afford the mortgage payment for your home loan. If your mortgage reverts to a variable rate that is considerably high, you may suddenly find that you arent able to come up with your monthly fees. The terms of your loan after the initial 5 year fixed rate period are therefore very important when deciding if you can afford to take out this type of home to finance a property. When you are calculating whether or not you can afford the future mortgage payments, assume a high variable rate to be sure that you can afford the loan even in the worst case scenario.
Changes to Finances
One of the most common reasons that someone cant afford a mortgage payment is that there is a drastic change to their personal finances. You may lose your job, run through a savings account because of an unexpected major emergency, or expand your family. A lot can happen in five years to make your finances change. To that end, you may never know if you can really afford the mortgage that you are about to take out. With that in mind, you can better prepare yourself to be able to continue to pay your mortgage in the face of a financial downturn by borrowing less than you can actually afford. If you do that, then if your finances change for the worse you wont immediate be unable to make ends meet.
Reverting Interest Rate
An interest rate that reverts to a different fixed rate after the initial 5 year fixed period lets you better plan for the future of your payments. Since you always negotiate the terms of your entire mortgage at the start, your lender will tell you if the future interest rate is fixed at a much higher level. Always read the fine print, and calculate what your payment will be with the reverted rate. In some cases, you may revert not to a fixed rate but instead to a variable rate based on a specific scale, such as the Bank of England rates.
You should never take out a home mortgage that has a rate or required payment not well within your means. With just one catastrophe, you may find that its hard to come up with the payment. The best way to avoid such a situation is to consider the long term payment schedule, not just the short term five year plan. In some cases, you may be able to negotiate a payment holiday as well. This allows you to miss a single payment per year, with a maximum number of missed payments throughout the life of the mortgage that is usually around six. These holidays are not a long term solution to a trouble mortgage, but may offer some assistance if you cant afford the mortgage one month.
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