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Traditional Fixed Rate Mortgage? Adjustable Rate Mortgage? 5/1
ARM? 3/1 ARM? Negative or Option ARM?
You are
wondering which kind of mortgage is best. The simple answer
is: There is no right loan. Deciding which type of mortgage
will best serve your individual needs can be difficult. It is
critical to spend a little time understanding the advantages
and disadvantages of each program. With a little effort you
can save thousands by choosing the right mortgage.
There are
several characteristics in each type of loan, some of each
will be to your benefit and some will not. Taking each
characteristic into account and their combined effect will
guide you in your decision making. I order to be able to
analyze the various products you need to examine your personal
circumstances rather than directly comparing the mortgage
types.
By answering the following questions, you will be able to make
an informed decision:
How long
do you plan to stay in this home?
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 of less, you should seriously
consider an adjustable rate loan. Depending on the level of
risk you are willing to take, the first adjustment can be one,
three or five years from now.
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. But what if you
are not qualified for that payment though you may qualify for
the slightly lower 5/1 ARM payment.
What are
your income expectations?
Do you
anticipate a gradual or dramatic increase in your income in
the next few years? This applies to the newly graduate who has
only been in the workforce for a few years. If so then an
adjustable rate mortgage will be ideal.
How much
cash do you have available for upfront costs?
If you
have the cash available, you may want to make a larger down
payment and reduce your monthly payments. Keep in mind that
you’ll have closing costs and fees to pay in addition to your
down payment. Furthermore, will feel safer keeping the cash in
reserve and put up with slightly higher payments. If you don’t
have much cash saved for your upfront costs, don’t despair.
You may have to settle for a higher monthly payment.
In
addition to the above, you need to make an informed decision
about your lender and other details of the offering.
Annual
Percentage Rate
(ARP)
This most likely is 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
This
varies greatly. Watch out for the subtleties of the terms
used, like origination and discount which basically mean the
same thing. Look out for hidden fees. Make sure the lender
discloses all fees; ask what they charge and what is included
and what is not. Take it writing and compare.
Lender
Reputation
Don’t
rely on solely someone else’s recommendation. And above all,
don’t rely on a Real Estate Agent’s recommendation, especially
if they are trying to get you to use their in-house lender.
You, not your friend, or the real estate agent must feel
comfortable with your lender.
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