Fortunately for buyers, there are a variety of mortgages to choose
from. It is in your best interest to investigate each of them to determine
which is the best for your situation. You probably won't qualify for
all of them. In fact, you may only qualify for one. But if you do qualify
for more than one, you may save yourself money (or worry) in the long
run if you do your homework before signing on the dotted line.
- You plan on living in your new home for many years, and/or
- You are not a risk-taker and prefer the stability of knowing how much your payment will
be each month.
Since most home loans are for a period of 30 years, if you want a payment
you can count on for that long of a period of time, a fixed rate mortgage
may be what works best for you. Once your loan amount and interest rate
are calculated and locked in, a fixed rate mortgage will guarantee that
you will have the same payment over the life of the loan. Making extra
payments to the principal will allow you to pay your loan off sooner.
This may not always be the best choice, however. If interest rates are
very high at the time you take out your loan, with a fixed rate mortgage
you'll be stuck with that high interest for the life of the loan (unless
you choose to refinance). Conversely, if interest rates are very low,
you'll come out the winner with interest rates that will stay low no
matter how high interest rates go in the future.
The following are descriptions of the varying lengths and terms of
fixed-rate mortgages
15-Year Fixed-Rate:
- You pay off the loan in half the time of a 30-year loan.
- Equity builds up more quickly than in a 30-year loan.
- Payments are higher (which may be a problem if you lose your job
or become unable to work).
20-Year Fixed-Rate:
- You pay off the loan in 2/3 the time of a 30-year loan.
- The overall interest paid is considerably less than for a 30-year loan.
30-Year Fixed-Rate:
- The most common choice, especially for first-time home buyers, as it is easiest of the
fixed-rate loans to qualify for.
- Monthly payments are lower than for 15-year and 20-year loans. (Especially
helpful if you don't have a lot of "padding" between the
amount you can afford to spend & the monthly payment for your
desired property).
- More desirable if you plan on staying in the same home for years, since equity builds
more slowly than for shorter term loans.
- For income tax purposes, this term provides the maximum interest deduction.
Adjustable-Rate
Mortgages (ARMs)
If you are more comfortable in taking a risk with your money, or if
interest rates are very high at the time you take out your loan, an
adjustable-rate mortgage (ARM) may be the type for you. You might also
choose this type of loan if your planned ownership of the property is
short-term or if you expect your income will increase to cover any potential
rise in the interest rate.
Generally, the interest rate when you take out your loan will be lower
than a fixed-rate mortgage. Please note that this is true initially,
not necessarily long-term.
Since an ARM rate rises and falls depending on the prevailing interest
rate, your mortgage payment will rise and fall accordingly. If your
income isn't sufficient to cover the highest possible payments, then
this option isn't for you. On the positive side, the lower initial payments
will allow you to qualify for a larger loan than if you chose a fixed-rate
type. The downside is that your payments will increase if/when the rates
go up.
Typically, ARM interest rates are tied to a specific financial index
(such as Certificate of Deposit index, Treasury or T-Bill rate, Cost
of Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate])
and your payment will be based on the index your lender uses plus a
margin (generally two to three points). Get the formula used by your
lender in writing and make sure you understand what it means.
Fortunately, the amount an ARM can rise is not unlimited. There are
"caps" on how much your lender can increase your rate, both for a period
of one year and for the life of the loan. Plan ahead, and have your
lender calculate what the maximum payment would be if your rate went
to the highest amount allowed by the cap for your particular mortgage.
If you're not confident you'll be able to pay that amount on a monthly
basis, perhaps you should reconsider this type of loan.
Convertible ARMs
If neither the fixed-rate nor the adjustable-rate mortgage seems the
best option, perhaps the convertible ARM will be right for you. This
alternative combines the initial advantage of an ARM with a fixed rate
after a predetermined number of years. Obviously, this type of mortgage
has more advantages when the initial interest rate is low and the future
rate is not guaranteed.
Government Loans
Another mortgage option for some people is a government loan, providing
that you meet the qualifications for these loans.
- VA Loans: Veterans may qualify for a loan from
the Veterans Administration. There is a limit on the amount you can
borrow, so this option works best for those buying a lower priced
home.
|