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Taking the Mystery Out of Home Mortgages

Thinking about buying a home of your own? Upgrading to something better from the one you already have? Finding the perfect second home – in the mountains or near the water?

Every real estate purchase is unique, but all of them have something in common, especially when it comes to choosing the type of mortgage that’s best for you, and making sure you qualify. Guidance and good advice is available online, so you can come to the project armed with information.

Your income and your debts will typically play the greatest role in determining your price range. Before you sit down with a real estate person, run the numbers yourself on the affordability calculator.

There are several kinds of mortgage loans, and the one you select will depend on how long you plan to stay in the home, how much money you have to put down, and how you’ll finance the closing costs.

Fixed-rate mortgages

With a fixed-rate mortgage, the interest rate and principal payments remain the same for the entire life of the loan. (Taxes may change, however.)

They come in terms of 30, 20, and 15 years.

• Advantages of the fixed-rate mortgage are its stability – your rate won’t change, so principal and interest payments won’t either. You don’t need to worry about market fluctuations.

• Disadvantages are that the fixed-rate loan is usually priced higher than an adjustable-rate mortgage, so it may cost you more – especially if the rates are high when you negotiate your mortgage.

Adjustable-rate mortgages (ARM)

With this type of mortgage, the interest rate changes over the life of the loan – according to terms specified in advance. Some of its features are:

• The initial interest rate is usually lower than with a fixed-rate mortgage.
• The monthly repayment would also be lower.
• The interest rate may be adjusted up or down at pre-determined times.
• The monthly payment will then increase or decrease.
• Most ARM programs do offer “rate cap protection” that limits the amount the rate can be increased, both each year and over the life of the loan.
• All ARMs are amortized over 30 years.

• Advantages are that ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If interest rates go down, you’ll enjoy lower payments. Usually an ARM is the best choice if you plan to relocate, or to be in the property only for three to five years.

• Disadvantages are that your monthly payments can increase if interest rates go up. ARMs are best for homeowners who aren’t planning on staying with a property for a long period.

September 6, 2001

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