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Choosing the right home mortgage: a little time can make big difference.

Not that long ago, choosing different types of mortgages was an option home buyers didn't have. The 30-year fixed-rate mortgage ruled, and if you didn't like it, tough - keep renting.

In the last several decades, that picture has changed dramatically. Today, most mortgage lenders offer a wide variety of loans, including some with fixed interest rates and others with rates that are periodically adjusted.

And while it may seem like just one more choice you have to make at a time when you've already got too many, choosing the best mortgage for you could mean the difference between getting the home you really want and settling for something less - or saving you thousands of dollars over the life of the mortgage.

How can you decide which type of mortgage is right for you? The easiest and most reliable way is to sit down with an experienced loan officer, like those from Fleet Mortgage, and sort through your options. Go to your meeting prepared to discuss the four factors experts agree are most important:

* Your current financial situation;

* How you expect your finances to change;

* How long you intend to keep the home you're buying; and

* How comfortable you are with the possibility of your mortgage payment increasing.

Finally, as you consider your options, remember that choosing a mortgage may seem more complicated than it really is because all the mortgages you've seen and heard about really fall into just three categories:

Fixed-Rate Mortgages

Fixed-rate mortgages take their name from the fact that the interest rate is fixed for the life of the mortgage. That means your monthly payments for interest and principal never change for as long as you hold the mortgage (although property taxes and homeowners insurance, usually included in the monthly payment, may change slightly from year to year).

For many prospective homeowners, this predictability - the fact that you know what your monthly payment will be - outweighs the advantages offered by variable-rate mortgages.

In fact, the 30-year fixed-rate mortgage is still the most popular kind of mortgage available. It offers the lowest monthly payments of any of the common fixed-rate loans, and is therefore more affordable for many prospective homeowners. That affordability, combined with its predictable monthly payments, makes this kind of mortgage the best choice for many people.

If you can afford higher monthly payments but still like the security of a fixed rate, consider a 15-year fixed-rate mortgage, which lets you own your home in half the time - perhaps before your children start college or you reach retirement. More importantly, because the term of the mortgage is shorter, you'll pay less than half the total interest of a 30-year mortgage over the life of the loan.

Other, less common types of fixed-rate mortgages may be available from some lenders. If you've decided that security and predictability are what you're looking for, ask your lender if they offer any other fixed-rate loans.

Adjustable Rate Mortgages (ARMs)

As you can guess from the name, the interest rate of an adjustable rate mortgage changes - for example, once a year. If interest rates go up during that time, the interest rate for your mortgage will go up - and so will your monthly payment. By the same token, if rates go down, your mortgage payment will drop.

With an ARM, your lender doesn't assume all the risks of changing interest rates - you share in them. As a result, you can get an ARM with an initial interest rate that is usually two to three percent lower than a comparable fixed-rate mortgage.

This lower interest rate is the most important advantage of an ARM. It can help make home-ownership more affordable, or enable you to buy more home. It can also make qualifying for a mortgage easier. And if interest rates decline, your mortgage payments decline as well.

But variable rates mean that your monthly payment could go up, too - and even though interest rates have been fairly stable for the last several years, if you decide on an ARM you must be prepared for the possibility of an increase in your monthly payment.

There are too many different types of ARMs to describe them all. But all of them combine the same five basic "ingredients" and by choosing your ARM carefully, you may be able to benefit from most of the advantages of an ARM while minimizing the risks. The basic elements you need to consider are:

* The initial interest rate, which is typically 2 to 3 percent lower than a comparable fixed-rate mortgage;

* The adjustment interval, or the time between changes in your mortgage's interest rate. Typical intervals are one year, three years and five years;

* The index, or the economic indicator(s) that are used to determine changes in the ARM's interest rate;

* The margin, or the additional amount the lender adds to the index to establish the actual interest rate on an ARM.

* The caps, or safeguards that limit the risk of sharply higher payments. One type of safeguard, an interest rate cap, limits the amount by which the interest rate can change at each adjustment.

* Another type, a payment cap, limits the increase in your monthly payment to a specific dollar amount. With this type, however, the interest rate underlying your monthly payment may increase more than your payment, meaning you could be liable for additional payments beyond the life of your loan.

The key to choosing the best ARM is to consider all these features against your own financial situation, and your expectations for how it will change.

For example, if you're in line for a major promotion or your spouse is planning to take a job, potentially higher payments may not be a problem for you. You may be comfortable foregoing a longer adjustment interval or stringent caps, while instead searching for the lowest possible initial interest rate.

Likewise, if you're planning to stay in the home you're buying for just a few years, an ARM with an adjustment interval of five years would give you the advantages of a lower interest rate with none of the risks - as long as you sell before the five years are up.

Convertible Mortgages

In recent years, mortgage lenders have developed a third type of mortgage that combines features of fixed-rate and adjustable mortgages, offering some of the advantages of both. Called convertible or hybrid mortgages, they're a little less common than the other two types - but you may find they're worth looking into.

A Convertible Adjustable Rate Mortgage is an ARM with a special option that allows you to convert it to a fixed-rate mortgage, usually after a set period of time. It offers the lower initial interest rate of a standard ARM, along with the possibility of locking in to predictable payments at a later time. (Of course, if interest rates have risen to a higher level when the option to convert is available, you may not want to go ahead with it. In that case, your mortgage acts like a regular ARM.)

A Combination Mortgage combines the low-rate feature of an adjustable-rate mortgage with the payment stability of a fixed-rate loan in the early years. Fleet Mortgage offers 3/1, 5/1 and 7/1 mortgages, which feature a low fixed-rate for the first 3, 5 or 7 years and a conversion to a one-year adjustable rate every year thereafter.

Other Mortgage Options

In addition to these basic kinds of mortgages, some home buyers can qualify for special mortgage programs backed by federal, state and local government agencies. These mortgage loans - examples include FHA mortgages (Federal Housing Administration) and VA mortgages (Department of Veteran Affairs) - offer unique benefits such as significantly lower down payments or more flexible qualification requirements. Fleet Mortgage also offers its own easy-qualifying "Home Possible" mortgage to assist families with low- to moderate-incomes.

Other mortgages may be available through your lender that offer a combination of features that could be perfect for you, so be sure to ask. The time you spend listening to the answer - and discussing all your mortgage choices - could be some of the most valuable time you spend.
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Author:Cassidy, Shawn
Publication:Real Estate Weekly
Date:May 6, 1998
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