With this type of loan, your payments and your interest rate stay the same until the house is paid off (unless you decide to refinance at some point). Depending on the lender, you may be able to incorporate your property taxes and homeowner’s insurance into the loan, which would push your payments a little higher.
This type of loan offers stability since your payments are guaranteed to stay the same, which makes budgeting and long-term planning easier. The downside is that since your interest rate is fixed you’ll have to refinance to get a better deal if rates go down.
You also want to think about how long you’re planning to stay in the home before you sign on the dotted line. It generally takes anywhere from three to five years to reach the break-even point and recover your initial costs so if you’re not planning to stay put for long you could end up losing money on the deal.
If you’re looking at a 30-year loan you need to be aware of what your lender requires in terms of a down payment. Typically, 20% down is the norm but if you’re trying to get an FHA loan you may be able to get financing with as little as 3% down. Just be aware that if you’re not putting down the full 20% you may be required to pay for private mortgage insurance.
15-Year Mortgage Loan
With a 15-year mortgage term you’re looking at a higher monthly payment but the upside is that you’ll be paying off your home in half the time. These loans also offer a fixed rate so you won’t have to worry about your interest fluctuating over time. If you’re not concerned about any major upheavals in your financial situation, taking on a 15-year loan versus a 30-year term may be a smart move if you can afford the higher payments.
The other instance where you may want to consider a 15-year loan is if you’re looking to refinance. If you’ve already been in the home for a while you’ve probably already paid off a significant chunk of the interest on your current loan. Refinancing can get you a better rate and lower your payments but if you’re stretching it for another thirty years you may end up paying more for your home in the long run.
Adjustable Rate Mortgages
Thanks to the financial chaos created by the collapse of the housing market in 2008 adjustable rate mortgages have gotten a bad reputation but the number of homeowners opting for this type of loan is once again on the rise. With an adjustable rate mortgage, the amount of interest you pay adjusts periodically at times determined by the loan agreement, usually every 1, 3, 5 or 7 years. The rates are tied to market trends and are calculated accordingly.
Typically, with an adjustable rate loan you would pay a lower amount of interest in the beginning and a higher amount once the loan adjusts. If you’re not planning to stay in the home very long, taking on an ARM may actually save you some money up front. The danger with this type of loan is that if the adjusted rate is substantially higher than what you’re used to it could make it difficult or even impossible to keep up with the payments if you’re planning to stay put.
As the events of the last few years in the real estate industry show, people forget about the tremendous financial responsibility of purchasing a home at their peril.
1. Get pre-approved. By getting pre-approved as a buyer, you can save yourself the grief of looking at houses you can’t afford. You can also put yourself in a better position to make a serious offer when you do find the right house. Unlike pre-qualification, which is based on a cursory review of your finances, pre-approval from a lender is based on your actual income, debt and credit history. By doing a thorough analysis of your actual spending power, you’ll be less likely to get in over your head.
2. Choose your mortgage carefully. Used to be the emphasis when it came to mortgages was on paying them off as soon as possible. Today, the debt the average person will accumulate due to credit cards, student loans, etc. means it’s better to opt for the 30-year mortgage instead of the 15-year. This way, you have a lower monthly payment, with the option of paying an additional principal when money is good. Additionally, when picking a mortgage, you usually have the option of paying additional points (a portion of the interest that you pay at closing) in exchange for a lower interest rate. If you plan to stay in the house for a long time—and given the current real estate market, you should—taking the points will save you money.
3. Compare lenders. Get estimates from at least two lenders