Choosing the Right Mortgage
There are many different types of mortgages available, and you can use this to your advantage. Now you just need to decide the one that's right for you.
Fixed Rate Mortgage
With a fixed rate mortgage, you know exactly what your principal and interest payment will be every month. It won't change because your interest rate won't change.
Please be aware that the portion of your monthly payment for property taxes or hazard insurance CAN change, as those costs go up or down. This could cause your total monthly payment to vary from time to time.
If interest rates go up, you are protected with a fixed rate mortgage. But you won't benefit if rates go down. The only way to take advantage of falling rates would be to refinance your mortgage.
Consider A Fixed Rate Mortgage if you:
- Want the certainty of a fixed principal and interest payment.
- Believe interest rates may go up.
- Are on a fixed or tight budget.
30-Year, 15-Year or 10-Year Fixed Rate Mortgage
Which is right for you? A 30-year loan has lower payments, but you pay for a longer period of time. Payments on a 15-year or 10-year mortgage will be higher, but may not be as high as you may think. The example below compares the principal and interest payments for a 30-year, 15-year and 10-year mortgage based on the same loan amount and rate
A $50,000 mortgage @ 6% for 30 years = $299.77/month
A $50,000 mortgage @ 6% for 15 years = $421.92/month
A $50,000 mortgage @ 6% for 10 years = $555.10/month
When you compare the 15-year mortgage to the 30-year mortgage in this example, by paying $122.15 more per month, you own your home in half the time and save a total of $31,971.60 in interest. Plus, interest rates on 15-year mortgages are usually lower than on 30-year loans, so you could save even more. You would save a total of $41,305.20 in interest payments with the 10-year mortgage compared to the 30-year mortgage in this example.
Adjustable Rate Mortgages (ARMs)
Compared to fixed rate mortgages, ARMs usually offer a lower interest rate to start, so monthly payments are lower. The interest rate is based on an "index" determined by your loan agreement. The lender then adds a set "margin" to that index. Your payments could go up or down as the index is adjusted, depending on the economy.
The index, margin and rate adjusment schedule (usually 1, 3, 5 or 7 years) can be different for each lender. Be sure to ask what they are.
Look for ARMs with interest rate "caps." These limit how much your rate can change each time it adjusts, and how much it can go up over the life of the loan.
Consider An Adjustable Rate Mortgage If You:
1. Want or need more home than you can qualify for now at a fixed rate.
2. Are confident your income will increase.
3. Believe interest rates will probably stay the same or go down.
4. Plan on moving within five to seven years of buying your home.
If the starting rate is very low compared to others, you're probably getting a "discounted" rate. In that case, even if market rates stay the same, your payment will go up when it's time to adjust.
Some lenders offer first payments that don't cover the cost of the principal and the interest. That's called "negative amortization" and, in effect, increases the principal amount of your mortgage. When you talk to lenders, we caution you to ask them about negative amortization.
Other ARMs allow you to convert to a fixed rate later, usually for a fee. Normally that rate will be higher than other fixed rates when you convert.
First time homebuyer loans, low down payment options, rural housing loans, low to moderate income lending and lending for targeted areas are all available as financing options. If you have good credit, but have difficulty with the requirements of standard mortgages, ask about these special loans.
FHA loans usually offer lower interest rates and require smaller down payments. Both fixed and ARM loans are available. These loans are insured by the Federal Housing Administration and must meet FHA guidelines. Ask about qualification and full information.
Eligible veterans can get long-term loans with little or no down payment, flexible-qualifying standards and possibly lower interest rates. These loans are made possible by the Department of Veterans' Affairs.