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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