Traditional Fixed Rate Mortgage? Graduated-Payment
Mortgage? Adjustable Rate Mortgage? FHA Mortgage? Two-Step
Mortgage?
You are wondering which kind of mortgage is
best. The answer: There is no one correct answer. Deciding
which type of mortgage will best fulfill your needs can be
difficult. There are so many types of loans and different
term lengths. Your choice is extremely important and can
take some time and effort to research. While often neglected
by homebuyers, a little research before choosing your mortgage
can save you thousands of dollars in the long run.
There are several elements of a loan that should
be analyzed. While one of these elements may suggest one
type of loan, another may call for a different type. You
must weigh each ingredient separately and collectively. You
will find that your answers to the questions below will ultimately
determine the type of mortgage that best fits your needs.
- How long do you plan to stay in this home?
Five years? Ten years? Thirty years? The length of time you will
be in the home will certainly play a part in determining which
loan to apply for. If you only plan to be in the home for 5–7
years or less, you should seriously consider an adjustable rate
loan. If you intend on staying 20–30 years, a fixed rate
mortgage may be right for you.
- How much risk are you willing to accept?
If you are the type of buyer that needs to know exactly what you
will be paying each month for the term of the mortgage, a fixed
rate mortgage will fulfill this need. The fixed rate loan, however,
will also net a higher interest rate. If you are willing to take
some risk of fluctuations in the interest rate, you may be able
to receive a lower interest rate.
- What are your income expectations?
Plan for the future. Do you anticipate a gradual or dramatic increase
in your income in the next few years? If you expect a big increase,
a graduated payment mortgage may be best for you.
- How much cash do you have available for
upfront costs?
If you have the resources, you may want to make a larger down payment
to lower your monthly payment. By keeping a higher monthly payment
however, you might be able to shorten the term of the loan to a 15-year
loan in order to pay it off quicker.
Keep in mind that you’ll have closing
costs and fees to pay in addition to your down payment. If
you don’t have much cash saved for your upfront costs,
don’t despair. You may be need to accept a higher monthly
payment or even lower your monthly obligation by choosing
an adjustable rate mortgage.
In addition to choosing a type of loan, you
must also consider which lender to use. Once again, several
factors will influence your decision.
Annual Percentage Rate (APR)
This is most likely the best way to make an "apples-to-apples" comparison
of lenders. The APR reflects the cost of credit on a yearly rate
and includes any points and fees in addition to the interest rate.
Interest Rate
Find out the rate the lender will commit and how long the lender
will guarantee it. Get any commitments in writing. As with any
transaction, if it isn’t in writing it doesn’t exist.
Points and fees
These factors will vary greatly. Look out for hidden fees. Make sure
the lenders disclose all fees; ask what they charge and what is
included and what is not.
Loan Approval
Both approval and funding time should be considered. You don’t
want to lose a prospective home because your lender takes weeks to
fund your loan. A lender should be able to fund the loan within ten
days.
Lender Reputation
Don’t rely on solely someone else’s recommendation. You,
not your friend, must feel comfortable with your lender. If you do
feel good about your lender and trust him , it will be much easier
to trust his advice on what kind of mortgage will best suit your
needs.
