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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 the advantages and
disadvantages of the varying lengths and
terms of fixed-rate mortgages:
15-Year Fixed-Rate:
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:
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 do not have a lot
of "padding" between the amount
you can afford to spend and 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 is
not sufficient to cover the highest
possible payments, then this option is
not 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 limited. 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 are 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 or the
adjustable-rate mortgage seems like 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. .
FHA Loans: The Federal
Housing Association offers loans
to lower-income Americans. Look
for the phrase "FHA approved"
when looking at ads for homes.
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