How To Pick The Best Mortgage For You
If you read our previous articles about Mortgage Loan Basic Terms and Exotic Mortgage Loan Options, you would understand more about the mortgage options available today. With so many mortgage options out there, don’t just take the first one to offer nice terms as buying a house and then taking home loan is a big investment. Your decision today will affect your personal financial condition in the future. As well as any big investment, you have to shop around for the best mortgage available. You should think of the fact that by the time you pay off your mortgage, you will have paid almost twice the cost of the home in interest alone.
For example, if you take a mortgage at 8% interest for $125,000 for 30 years, you will pay over $205,000 in interest, for a total of $330,000. And your home may not appreciate by that much — your $125,000 cost you $330,000.
You can see why you need to shop wisely for your mortgage.
All mortgages are not created equal. There are so many mortgages on the market right now that they can become a little confusing. You have to do your homework to find the right mortgage type, the right bank or mortgage company and the right terms.
One of the best places to start your search is on the Internet. You can use a mortgage calculator to see how much of a mortgage you can afford and what you could qualify for. You can compare different loans and lenders, search for the lowest rates and even apply online.
You have to make decision mainly on two things:
- how much you can afford
- what type of mortgage you want
Basically, there are two types of mortgages:
Fixed Rate Mortgage
Fixed rate mortgages are traditional loans with fixed interest rates over the life of the loan. The length of repayment may be anywhere from 10 to 30 years. Your monthly payment for interest and principal will never change, but if you have your insurance and taxes in escrow, you may see a slight change over time. Downpayments usually run 20%, but you could pay as little as 5% down with certain loan programs. Fixed rate mortgages offer predictable payments and are especially nice if you take the mortgage out during a low interest rate period.
Adjustable Rate Mortgage
Adjustable rate mortgages (ARMs) start out with a low interest rate, but the rate and payments may go up or down depending on the market interest rates. Most ARMs are adjusted every year, but there are some out there that adjust more frequently. The mortgage usually is capped for how much the interest rate can be raised each time and over the life of the loan. For example, you may take out a ARM that has a 2/8 cap. This mortgage can adjust only 2 points at the maximum each year. Over the life of the loan, the mortgage can only go up by a total 8 points. If your interest starts out at 7%, the second year it could increase to 9%, and increase each year thereafter until it reaches a maximum of 15%. That is if rates continue up. The interest rate could also go down.
ARMs are great for those who want more of a house, knowing their income will go up in the next few years. But be aware that when rates go up, the payment amounts go up. You need to make sure you could make the payments if the mortgage was to reach it’s peak rate.
There are also balloon mortgage and jumbo loan available out there. Balloon mortgages are good for those who know they will be moving in a few years. Jumbo loans are a larger than average loan for those who want to borrow more than the average mortgage amount set by Fannie Mae or Freddie Mac. There are also option ARMs that allow you to pay only a minimum payment amount for a certain period of time. These loans all come with more risk and must be thought out carefully. More options of mortgage can be called as “exotic mortgage”, a term use to to describe any nontraditional mortgages that allow homeowners to be able to afford high-priced homes. These mortgages are normally risky for both the borrower and the lender. (Read more about Exotic Mortgage Loan Options)
You can find many articles and educational tools online or even a financial advisor that will help you determine the best mortgage for your financial situation. In general, you want to take out as small a mortgage as necessary, find the lowest rate possible and consider how your future could affect your ability to repay a mortgage.
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