Finding the mortgage that’s right for you!
Finding the right mortgage has two big upsides:
You acquire property in a way that works for your particular financing situation.
And because you choose the right type of loan, you save thousands in interest.
Here’s what you need to know before you sign the dotted line.
Adjustable Rate: If you can handle some risk or will probably move
The advantages of adjustable-rate mortgages (ARMs) are two-fold:
you can usually get a larger loan at a lower initial interest rate
( called the start rate) than with a fixed-rate mortgage.
That is because you’re taking on some risk: after the start rate period
is up (it typically lasts for one, three, five or seven years), an ARM’s
interest rate changes periodically according to a money-market index that
it’s tied to, such as one-year treasury note. If interest rates go up,
so do your monthly payments; if they go down, you’ll pay less. That may
make perfect sense for you, depending on how much risk you feel comfortable
with and what interest projections are.
Ask your self
How long do you plan to stay? If you know you’re going to be in a property for
seven years or less, an ARM can be a good option because you will likely sell
the property before the interest has the potential to spike.
Is your income likely to increase?
If not, figure out how much you can afford
for your monthly payments to be before they become a hardship.
Ask your lender
What index is the rate tied to and how often will it adjust? Look for the
least-volatile indexes (usually considered to be the federal cost of funds
or the 11th District Cost of Funds indexes, known as COFIs). Likewise, look
for longer adjustment periods say, every one to three years instead of every
six months that protect you from short term market fluctuations and make it
easier to plan your finances.
What are the caps?
There are two types of ARM rates restrictions, or caps,
which protect you to some degree from drastic changes in the market: One limits
the amount that your payments can rise yearly (or in any single adjustment
period); the other limits the maximum rate you pay regardless of what happens
to interest rates. You want caps to be under 2.5% for the adjustment period
increase, and at 6% or less for the life the loan limit.
Smart ways to save:
No matter which type of mortgage you get, think about reducing the amount
of interest you pay by doing one of the following:
1. Make 2 monthly payments
By dividing your monthly payment in two, you pay the interest a little sooner on half the payment each month, which adds up over the long haul. And because there are 26 two-week payments in a year, you make the equivalent of 13 monthly payments instead of 12. the result: you can pay off a 30-year mortgage in 22 years.
2. Pay ahead of schedule
Make sure your loan doesn't have a pre-payment penalty. That way, you can make additional payments on the loan’s principal anytime you want, cutting down the amount of interest you owe. For example, by paying only one extra payment at the beginning of each year on a 30-year-loan, you cut the loan to 23 years.
3. Consider a shorter loan
The shorter the loan , the lower the interest rate and the less time you’ll pay interest. If you can afford it, get a 15 year loan instead of 30 year one. Or see whether your lender can cut five years off the loan you’re considering. Your monthly payments will be a little higher, but you’ll save a bundle in interest in the long run.