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.
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). 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 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 (which may be a problem if you lose your job or become unable to work).
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:
- The most common choice, especially for first-time homebuyers, as it's the easiest of the fixed-rate loans to qualify for.
- Monthly payments are lower than for 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.
- More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
- For income tax purposes, this 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 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 prevailing interest rate,
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. 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 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. If you
are not confident you'll be able to pay that amount on a monthly basis,
perhaps you should reconsider this
type of loan.
Convertible ARMs
If
neither the fixed-rate or the adjustable-rate mortgage seems like the
best option, perhaps the convertible ARM will be right for you. 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 people 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 to lower-income Americans. Look for the phrase "FHA approved"
when looking at ads for homes.
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Naturally, you want to get the best deal for the least amount of money. This holds true for mortgage rates as well.
A
lower interest rate means a lower monthly mortgage payment, which can
save you money in the long run. Also, it is easier to qualify for a
lower payment
than a higher one.
You
basically have two routes to finding the best rate. The first is to do
all the research on your own. The second is to use a mortgage broker.
Do-It-Yourself
With
the advent of the Internet, much of this information is readily
available online. Once you have educated yourself sufficiently about
real estate
loans, all it takes is the 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.
Some sources for interest rates on the Internet include:
Bank Rate Monitor (http://www.bankrate.com)
E-Loan (http://www.eloan.com)
When
comparing loans, make sure that you're 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), interest rate and "garbage fees"
(extra
fees which some lenders charge) 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'll
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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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 be asked for a down payment on the home you are
purchasing. You can choose to put down as much or as little
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.
During
this period of purchasing your home, you are going to need an escrow or
settlement company to act as an independent third party so that you know
when
and who to give your money to get the deed to your new home. 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. Make sure
that there
are sufficient funds in your account to cover this check.
The
deposit check will be cashed. 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.
The
period that you are "in escrow" is often 30 days, but may be longer or
shorter. During this time, each item specified in the contract must be
completed
satisfactorily. 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/or the seller have complied with them.
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
the final walk-through inspection. At this time, you should make sure
that the property is exactly as the contract says it should be. What you
thought
to be a "permanently attached" chandelier that would come with the
property might have been removed by the seller and replaced with a
different
fixture entirely.
You've made it! Once the sale has closed, you're the proud owner of a new home. Congratulations!
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