Which One Is
Right For You? by Kathy Scott
So you’re ready to buy a home. Finding that perfect
home can be a great adventure. Seeking out the
mortgage that’s right for you can be difficult.
There are a dozen or more options available for
financing a home, and it’s important to consider
the pros and cons of each. Before looking into
more complicated choices, consider the most common.
The most common home loans are the 30-year and
15- year fixed rate mortgages. With this type
of mortgage a lender amortizes the interest rate
and the home price over 15 or 30 years depending
on the loan. You are given a monthly payment that
never changes over the life of the loan. Fixed
rate mortgages have been extremely popular over
the past several years because interest rates
have been so low. According to Freddie Mac, an
organization chartered by Congress to expand opportunities
for home ownership, the current 30-year mortgage
interest rates are at their second lowest average
in 32 years. Homeowners also enjoy knowing that
their monthly payments will never change.
If you decide to go with a fixed rate mortgage,
consider both the 15-year and 30-year fixed rates.
You might be surprised to know that monthly payments
on a 15-year fixed can be only slightly higher
per month than a 30-year fixed, and the savings
on interest over the life of the loan can be substantial.
Rates for a 15- year fixed (5.23% avg) are also
lower than those of a 30-year fixed (5.75% avg)
according to Freddie Mac. So, if you borrow $200,000
against these two average rates, your monthly
payment for a 15-year fixed would be $1,606 per
month, paying $89,018 in interest over 15 years
compared to $1,167 per month for a 30-year fixed,
which will cost you $220,172 in interest over
the life of the loan.
Another common mortgage is an Adjustable Rate
Mortgage (ARM), popular because it offers even
lower interest rates than fixed rates with some
as low as 3.5 or 4%. Lower rates allow the borrower
to afford more home, but with ARMs, the rate only
stays stagnant for a limited period of time -
1, 3 or 5 years.
This type of loan is a great choice for borrowers
who don’t plan to be in the home longer than the
fixed period. The current ARM rate averages 4.17%.
Using that rate on a $200,000 loan, the borrower
would pay $975 per month, but once the ARM adjusts
after a fixed period, the monthly payment could
jump substantially, and it adjusts every year
thereafter for the life of the loan.
If you’re considering this type of loan, make
sure your lender offers some protection against
a huge interest rate increase with a cap. Caps
restrict the amount the interest rate of an ARM
can adjust. The two most common caps are Periodic
Rate Caps which limit the amount a rate can change
at any given time and Lifetime Caps which restrict
how much the interest rate can rise over the life
of the loan. Some lenders also offer a conversion
feature on an ARM that allows the borrower to
eventually convert it to a fixed rate for a fee.
Whatever loan you choose, make sure you understand
all the fees associated with it. Use a mortgage
company with a good track record and talk to several
lenders.
For more information:
http://www.freddiemac.com
http://www.fdic.gov/about/index.html
http://consumer.gov/
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