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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 (and worry)
in the long run if you do your homework before signing on
the dotted line.
Fixed Rate Mortgages
Consider a fixed rate mortgage if either of the following
describes you:
- 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 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 to 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 to 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 homebuyers, as it's the easiest of the fixed-rate
loans to qualify for.
- Monthly payments are lower than for
15-year and 20-year loans. This can prove 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 solution
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 to 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 choose a fixed-rate. 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 of 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 increase 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 available to 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.
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