|
 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 (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.
|
