Choosing the Best Mortgage
By Deborah Fowles
Why It’s Important and How To Do It
By the time you finish paying off the mortgage on your home, you’ll have paid more in interest alone than the actual purchase price of the house. For example, if you borrow $125,000 at 8% for 30 years, you’ll end up paying over $205,000 in interest, plus the $125,000 you borrowed. Your $125,000 house has cost you $330,000! so it makes sense to shop wisely for the best mortgage, since it will probably be the biggest financial decision of your life.
A mortgage is a mortgage is a mortgage, right? Wrong! There are many mortgage products on the market now, so it’s important for you to do your homework to determine which type is best for you, and which bank, savings and loan, mortgage bank, finance company or credit union offers the best terms for that type of loan.
The Internet makes this process easier.
You can find out how large a loan you qualify for, compare loans, search for the lowest rates in your area, and in some cases, apply online.
Although there are many mortgage products available, most fall into one of several general categories:
Fixed rate mortgages are the traditional loans that have a fixed interest rate over the life of the loan, typically 30, 20, 15, or 10 years. With these loans, your monthly payment for interest and principal never changes (your escrow expenses, such as property taxes and insurance, may change from year to year). Downpayments required on these loans can be as low as 5%. If you want predictable payments over the life of your loan and don’t mind paying a bit more for this assurance, the fixed rate mortgage may be the best option for you.
Adjustable rate mortgages typically start at a lower interest rate (and lower payments) but interest rates and payments fluctuate depending on market interest rates. A typical ARM is adjusted annually (although some are adjusted more frequently). Increases are usually capped for any given year and for the life of the loan. For example, a typical ARM might include an annual cap of two percentage points and a cap over the life of the loan of six percentage points. An ARM that starts out at 7.5% could increase to 9.5% in the second year, 11.5% in the third year, 13.5% in the fourth year, at which point it would be capped.
These loans are popular with people who expect rising income over the next few years because they can buy more house on a lower current income, confident that their increasing income will make the higher payments affordable if the interest rates rise in subsequent years.
If you know you’ll be moving in five to seven years, and you’d like a lower interest rate but are uncomfortable with an adjustable rate, the balloon mortgage may be for you. These loans often have a somewhat lower interest rate than a conventional 30-year mortgage, but the loan is due in five to seven years. If you’re still in the house at the end of the term, you’ll have to find another mortgage in order to pay off the first one.
Jumbo loans are just what their name implies: a larger than average loan. Most lenders follow the Fannie Mae or Freddie Mac federal guidelines for loans, which limit the amount you can borrow to $252,700. If you need to borrow more than this, you should look for a Jumbo loan.
The features of these loans are summarized in the table at the bottom of this page.
Before shopping for a mortgage, take advantage of some of the online tools that will help you be better informed so you can choose the mortgage that works best for you.
From Deborah Fowles,
Your Guide to Financial Planning.
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