You prefer the stability of knowing how much your payment will be each month.
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). On the other hand, 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.
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:
- Easiest of the fixed-rate loans to qualify for.
- Monthly payments are lower than 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.
- Provides the maximum interest deduction for tax purposes.
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 may 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 current interest rates, 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. However, the lower initial
payments will allow you to qualify for a larger loan than if you choose a fixed-rate.
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 how it works.
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.
Convertible ARMs
If neither the fixed-rate nor the adjustable-rate mortgage seems like an option for you,
perhaps the convertible ARM would be an option. 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 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 tlower-income households. Look for the phrase "FHA approved" when looking at ads for homes.
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Obtaining the Best Rates for Your Mortgage
Everyone would like to get the best deal for the least amount of money.
A lower interest rate means a lower monthly mortgage payment, which saves you money in the long run.
Do-It-Yourself
With the advent of the Internet, much of this information is readily available online.Once you have educated yourself sufficiently regarding real estate loans, it takes time and energy to sift through online resources to find the information you need.
Rates change quickly. That great rate you find today might not be there tomorrow. Once you find the rate you are looking for, submit a loan application and lock in that rate.
Sources for interest rates:
Bank Rate Monitor (http://www.bankrate.com)
E-Loan (http://www.eloan.com)
When comparing loans, make sure you are comparing loans of the same type. For
example, you find that "Loan A" for a 30-year loan has a much lower interest rate than
"Loan B" (also for 30 years). Upon further inspection, you find that "Loan A" is
technically an adjustable rate mortgage. Its payment is based on a 30-year amortization,
but becomes due through either payment or refinancing at the end of 5 or 7 years. These
are frequently referred to as a 5-year or 7-year fixed-rate mortgage. While both said "30-
year", they are not the same type of loan.
Ask the lender for a statement detailing all fees associated with the loan. Factors such as "points" (loan fee) and interest rates can vary greatly from one lender to another.
Mortgage Broker
If you do not have the time or experience to "do it yourself," look for a qualified
mortgage broker that can assist in finding the right mortgage for you. Ask friends and
associates who have refinanced or purchased recently if they have a broker they can
recommend. You will want to find a broker who is energetic, flexible and
knowledgeable about finance and loans and someone who has your best interests in
mind.
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Escrow
Congratulations, you are on your way to owning your very own home! Follow these
suggestions (and your realtor's advice) so that escrow and settlement with go as smooth
as possible.
You will place a down payment on the home you are purchasing. You can choose to put
down as much as you want (depending on your mortgage), but remember, the more you
put down toward the total price of your home, the less time it will take you to pay off
and the less your mortgage payments will be every month.
You will also need an escrow or settlement company to act as an independent third
party. The escrow or settlement company will hold your deposit and coordinate much of
the activity that goes on during the escrow period. This deposit check may also be held
by an attorney or in the broker's trust account.
The deposit check will be cashed so make sure that there are sufficient funds in your
account to cover this check. Assuming the sale goes through, this money will be applied
to the purchase price of the home. If for any reason the sale is not consummated, you
may be entitled to receive all of your deposit back, less standard cancellation fees. In
certain instances, the seller may be able to retain this money as liquidated damages.
Prior to executing a purchase contract, it would be wise to speak with your counsel
regarding whether or not it is your best interest to have a liquidated damages clause as
part of the contract.
During the time “in escrow”, each item specified in the contract must be completed. By
the time you have opened escrow, you have come to an agreement with the seller on the
closing date and the contingencies. Each contract is different, but most include the
following:
Inspection contingency: this should be completed as soon as possible after the contract
to purchase is signed as unsatisfactory results of the inspection may mean that you will
want to cancel the contract.
Financing contingency: once the contract is signed, you have a period of time to secure
funding. If, for any reason, you are unable to secure funding during the period of time
granted to you by the contract (and the seller will not provide a written extension of
time), you must decide whether you want to remove the contingency and take your
chances on getting a loan. You may choose to cancel the purchase contract.
A requirement that the seller must provide marketable title.
With an attorney or title officer, review the title report. The title must be "clear" to
ensure that you do not have legal issues regarding your ownership.
Check into local and state ordinances regarding property transfer and make sure that you
and the seller have completed all the paper work.
Secure homeowner's insurance. This will probably be required before you can close the
sale. Due to such requirements as special fire and earthquake insurance, obtaining this
insurance may require a lengthy period of time. It would be in your best interest to apply
for insurance as soon as possible after the contract is signed.
Contact local utility companies to schedule to have service turned on when you close
escrow.
Schedule a final walk-through inspection. At this time, make sure that the property is
exactly as the contract states.
Once the sale has closed, you're the proud owner of a new home. Congratulations!
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