You've found
the house of your dreams and now all you need is a loan.
With dozens of competing lenders and mortgages to choose
from, you may think that today's home loan market is very
confusing. The challenge is to match the mortgage to your
personal situations.
Though many mortgage choices are available, they all fall
into two categories: fixed, in which the interest rate and
sometimes the payments do not vary, and
adjustable/variable, in which they do. There are also a
number of "creative financing" alternatives that
can be combined with either fixed or adjustable rate
mortgages including shared appreciation, wraparounds,
assumable loans, seller financing, "convertible"
mortgages and/or buy-downs.
For years the fixed rate mortgage (FRM) was the most
popular choice among home buyers and sellers. The
advantage is that neither the interest rate nor the
monthly payment changes. FRMs are no longer limited to 30
years. Other variations include 10, 15 and 20 year
maturity periods, which can save you a substantial amount
of money, and bi-monthly and bi-weekly mortgages, which
will shorten the term of your loan.
An adjustable rate mortgage (ARM) is popular because of
the lower initial interest rate, as compared to an often
higher interest rate for fixed-rate financing. The lower
interest rate makes it easier to qualify for a loan
because less income is needed. In addition, the lower
interest rate may allow you to borrow more money and
purchase a larger or nicer home.
ARM borrowers, generally, are not "locked-in" to
high marketplace interest rates that may occur at the time
they obtain their loans, since ARMs will decrease if rates
decrease. Also, if you only expect to live in your house
for three to five years, an ARM may be the best choice
because the initial interest rates are lower. On the other
hand, an ARM does not allow the borrower to anticipate
precisely what mortgage costs will be over the life of the
loan. At each adjustment period, your ARM interest rate
and monthly payment may change. As a result, it may be
difficult to plan your finances.
You must shop around. Check with financial institutions in
your area to see which variations are offered and which
fit within your spending plan. Also, check on the
reliability of the mortgage lender before signing any
contract.
