Heidi Herzog
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Real Estate News
Which mortgage is best?
Things to consider when shopping for a home loan Monday, September 09, 2002 By Dian Hymer.
Inman News Features
It's a great time to shop for a mortgage. Mortgage money is plentiful.
Lenders are anxious to lend. And interest rates are at a multi-decade low.
Thirty-year fixed rate mortgages in the 6 percent range are popular with
today's borrowers. So are15-year mortgages at less than 6 percent.
Five-year fixed/AMR loans for only 5.5 percent are hard to refuse. Or
should you go with an ARM (adjustable rate mortgage) with a start rate of
3.95 percent? With so many mortgage alternatives available, how do you
decide which one is right for you? Here are a few guidelines to help you
decide: If you are buying or own a home you plan to live in indefinitely,
a 30-year or a 15-year fixed rate mortgage are the most attractive
options. With both options, the monthly mortgage payments are fixed for
the life of the loan, which gives you payment security. The monthly
payments on a 15-year loan are higher than they are on a 30-year, so you
need more income to qualify. But if you can qualify, you'll own your home
free and clear of a mortgage in just 15 years. And the interest savings is
huge. The interest rate on a 15-year mortgage is about 1/2 percent lower
than it is on a 30-year loan, plus you pay less interest over time?about
$100,000 less on a $200,000 mortgage. A disadvantage to some borrowers is
that you lose a tax deduction when your mortgage is paid off. One
advantage of a 30-year mortgage is lower monthly payments, which makes
qualifying easier. A 30-year mortgage also offers more flexibility,
particularly if you take out a mortgage that charges no penalty fees for
early prepayment. Let's say that your income is sporadic. When you receive
a bonus, you can pay down the principal balance to reduce your interest
expense. But when cash is in short supply, you can stick with the
manageable 30-year amortized payment. With a 15-year loan, you're stuck
with the higher payment regardless of your cash flow situation. HOUSE
HUNTING TIP: Even though low interest rates make fixed-rate financing the
most popular choice, ARMs may be preferable for some borrowers. If you're
sure you'll be moving again within five years, you'll probably save money
with an ARM that is fixed for five years at a lower interest rate than
either a 30- or 15-year fixed loan. After five years, the mortgage
converts to an adjustable. ARMs with interest rates that adjust from the
get-go aren't too popular with most borrowers today because interest rates
are expected to rise when the economy gathers steam. But if you are trying
to keep your monthly payments as low as possible, this could be the right
choice for you. Let's say you bought your home a year ago when you and
your partner both had good incomes. One of you lost a job and you're
trying to survive on one income. Refinancing a higher interest rate fixed
mortgage into an ARM that offers several payment options could be the
answer to your short-term cash flow situation. ARMs that allow negative
amortization also offer the borrower several payment options. Negative
amortization occurs when the payment doesn't cover the interest owed. When
this happens, the unpaid interest is added to the principal and your loan
balance rises. You can avoid negative amortization by making the fully
amortized payment or the interest-only payment amount. But if you're short
on cash, you can make the minimum payment due. THE CLOSING: Before you
sign up for an ARM with negative amortization, make sure you understand
how the loan works, and be diligent about paying any deferred interest as
soon as you are able. Dian Hymer is author of "House Hunting, The
Take-Along Workbook for Home Buyers", and "Starting Out, The Complete Home
Buyer's Guide," Chronicle Books.
***
Copyright 2002 Dian Hymer
Distributed by Inman News Features
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