|
| |
Types of Mortgages
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.
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 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
Veterans Administration loan. These loans are made by a lender, such as
a mortgage company, savings and loan or bank. VA's guaranty on the loan
protects the lender against loss if the payments are not made, and is intended
to encourage lenders to offer veterans loans with more favorable terms. There is a limit on the amount you can borrow, so this option
works best for those buying a lower priced home. |
|
FHA Loans: The Federal Housing Administration
has mortgage insurance to help you become a homeowner. FHA doesn't actually
make loans. Instead, it insures loans so that if buyers default for some
reason, the lenders will get their money. This encourages lenders to
give mortgages to people who might not otherwise qualify for a loan. You
may be able to get an FHA loan with 3% down, or even less! Talk to an
FHA-approved lender to see if an FHA loan might be right for you. |
|
