HOMES - FINANCING
"This section
contains additional data that supplements basic information contained in
Your
Money Matters
and should be used
in conjunction with the material contained in Your
Money Matters."
Mortgages
There are almost as many types of mortgages as there are types of
homes. Familiarize yourself with the most common types, so that you
can select the one most appropriate for your needs.
The two main types are fixed-rate and adjustable-rate mortgages. A fixed-rate mortgage is a loan whose rate of interest does not change during the life of the mortgage. As a result, your loan payment will be a constant amount. By contrast, an adjustable-rate mortgage is a loan whose interest rate fluctuates throughout the life of the loan.
The old-fashioned 30-year fixed rate mortgage is still a desirable commodity, particularly if you can lock in a reasonable interest rate (perhaps 9 percent or less). While an adjustable-rate mortgage may offer a lower interest rate at first, the security of knowing that your monthly payments will never change is important to the many home-buyers who opt for fixed-rate mortgages.
Your monthly payments will be higher with this than if you take out a 30-year fixed-rate mortgage, but the total interest you pay out over the life of the loan will be substantially lower. A 15-year fixed-rate mortgage is a good idea if you can afford the higher payments. Want to turn your 30-year mortgage into a 15-year mortgage at no cost? It's easy. Just make sufficient additional principal payments each month on your 30-year mortgage so that it is paid off over the shorter period of time. You can also cut your mortgage-repayment period down by taking out a biweekly mortgage.
A two-step mortgage is a variation of the 30-year fixed-rate mortgage. There is one fixed rate for the first phase of the loan - typically five to seven years - with a one-time adjustment for the remaining life of the loan. If you are planning on moving before the first phase expires, consider this option.
If you're thinking of staying in your home for only a few years - and
this is a tricky thing to think about - an adjustable-rate mortgage
is probably a good idea for you. Adjustable rate mortgages (ARMs) are
commonly available, and are most beneficial when interest rates are
low and are expected to stay low.
With an ARM, the interest rate and, hence, the monthly payment changes based on a financial index. Rather than locking in a fixed mortgage payment, ARM payments can and will change. The frequency of the interest rate change is spelled out when you take out the mortgage, but they typically vary from six months to three years. The initial interest rate is typically lower than those of fixed-rate mortgages. While this makes them attractive, payments can increase, sometimes sharply, if the index on which the adjustable rate is based increases. (If the initial ARM rate is super-low, you can rest assured that it will rise when the loan rate is first adjusted.) Many adjustable-rate mortgages have rate or payment caps, which means that your monthly payments won't go through the roof all of a sudden. However, you'll need to keep a weather eye on changes in the financial index, otherwise you may be caught unaware by a substantial increase in your monthly payments from one year to the next.
One of the most perplexing tasks the homebuyer will encounter is comparing mortgage terms. The impact of points on total carrying costs contributes to this confusion. Each point equals one percent of the loan amount. When comparing mortgages, one general rule of thumb is to equate each point with about 0.25 percent on the interest rate. For example, an 8.5 percent loan with two points is roughly equivalent to an 8.75 percent loan with one point. The significance of points diminishes as the period of time you own the home increases.
In some areas housing prices may have risen so much that people find themselves shut out of the housing market altogether. In other areas, depressed real estate markets may tend to make lenders wary. Today, the large number of foreclosures and the frequent practice of reselling mortgages on the secondary market are causing lenders to follow strict guidelines in assessing a prospective borrower's mortgage creditworthiness. The end result is that it is all the more important for you to carefully evaluate your creditworthiness prior to beginning your search in earnest.
You have a much better chance of arranging for a favorable mortgage
if you have maintained a good working relationship with a bank, and
if you have a clean credit history. You should get to know a personal
banker, and keep that person informed of your financial status. Even
if you are not currently interested in purchasing a specific house,
you should test for your mortgage-borrowing capacity. The banker
should be able to gauge whether you are capable of assuming a
substantial mortgage and may even be able to bend a few rules for you
if you are a good customer. Nevertheless, you should check with as
many other local lending institutions as possible.
Lending institutions vary both in the interest rates they charge and in mortgage terms and closing costs. If possible, the mortgage you arrange should be assumable - meaning that the next owner can assume the existing mortgage at the time of sale.Your agreement should not include a mortgage prepayment penalty, so that you will be able to repay the mortgage early, either with a lump sum or with periodic additional payments. Creditworthy borrowers should not hesitate to try to negotiate concessions on the loan terms.
In addition to scrutinizing lenders' fees for services rendered, you should compare lenders' mortgage rates. There are usually surprising differences among them. It is easy to get your hands on this information: Most local papers list the local lenders' rates in their financial sections. The next step is to ask your realtor or buyer's broker to run a computerized shopping service that can take your search for a suitable mortgage well beyond your local area. You don't have to take a mortgage from a bank in your area, and you may be able to get a better deal from an out-of-town lender.