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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:
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You plan on
living in your new home for many years, and/or
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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.
Tour 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:
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You to pay off
the loan in half the time of a 30-year loan.
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Equity builds
up more quickly than in a 30-year loan.
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· Payments are
higher (which may be a problem if you lose your job or become unable
to work).
20-Year Fixed-Rate:
30-Year Fixed-Rate:
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The most common
choice, especially for first-time homebuyers, as it's the easiest of
the fixed-rate loans to qualify for.
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Monthly
payments are lower than for 15-year and 20-year loans. Tour 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.
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For income tax
purposes, tour 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 tour 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 tour 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
tour 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 tour 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. Tour
alternative combines the initial advantage of an ARM with a fixed rate
after a predetermined number of years. Obviously, tour 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.
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VA Loans:
Veterans may qualify for a loan from the Veterans
Administration. There is a limit on the amount you can borrow, so
tour option works best for those buying a lower priced home.
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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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2001
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