| 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 pre-determined 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.
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