Mortgage sweet mortgage
Tuesday, March 1st, 2011
Choosing the right mortgage just as important as choosing the right home
Buying a home ranks as one of the largest investments most people will ever make. Add in the interest cost of a mortgage, and you’re talking about a sizeable financial commitment.
For example, if you borrow $500,000 at 5% for 30 years, you’ll pay $466,280 in interest over the life of the loan, in addition to repaying the $500,000 principal, for a grand total of $966,280. That’s why it pays to make sure you get the right mortgage for your situation.
To lock or not to lock?
An important choice you face is deciding between fixed-rate and adjustable-rate loans. With a fixed-rate loan, your interest rate won’t change during the life of the loan, but you’ll pay a little more for the privilege of “locking in” a rate for 20 or 30 years. That said, if interest rates are low, locking in your rate might be a smart move, especially if you plan to remain in your home for many years.
Adjustable-rate mortgages (or ARMs) usually start with lower interest rates than their fixed-rate brethren. If rates remain relatively stable while you’re repaying an ARM, your total cost could be lower than with a fixed-rate mortgage.
However, after a set term, commonly three or five years, ARM rates reset once a year (or in some cases more often). So if rates rise, your monthly payments do, too. Rate hikes typically are capped for any given year and for the life of the loan. Common caps are two percentage points a year and six points over the life of the loan. (See “A word about points” for more on how points work.)
A “balloon” mortgage is another way to keep monthly payments smaller. This loan type usually has a lower fixed interest rate than comparable adjustable- or traditional fixed-rate loans. However, after a specified period of time — often, five or seven years — the borrower must repay the remaining balance on the loan in full. That probably means refinancing at then-current rates, which could be higher.
Jumbo mortgages are larger mortgages. For 2010 and 2011, loans above $417,000 for a single-family home in most of the United States fall into the jumbo category. Generally, you can expect to pay at least one-half of a percentage point more for jumbo loans.
Income guidelines
Many borrowers got into hot water during the last housing boom because they bought houses they couldn’t afford without the aid of steadily appreciating home prices. By sticking to the following rules of thumb, available on Bankrate.com and elsewhere, you’ll be less likely to end up with a mortgage you can’t afford:
- Your monthly mortgage, property tax and homeowner’s insurance costs combined should not be greater than 28% of your gross (pre-tax) monthly salary.
- Your monthly mortgage, monthly property tax costs and other monthly debt payments combined shouldn’t be greater than 36% of your gross (pre-tax) monthly salary.
Naturally, individual circumstances may require modifying these guidelines.
Looking for deals
Don’t forget to check with local lenders to see if any of them are running special promotions on specific kinds of loans that might suit your needs. You can also consult websites such as Lendingtree.com and Bankrate.com to compare rates beyond your local area. Finally, don’t forget to talk to your financial advisor. He or she may have suggestions about the right type of loan for your situation and where you can obtain good rates.
SIDEBAR: A word about points
When shopping for a fixed-rate loan, you can usually pay a slightly higher interest rate for a loan with no “points,” or a lower rate with one or two points. Points are fees the bank charges when you receive the loan, with one point equal to one percent of your loan amount.
The longer you plan to stay in your home, the more sense it may make sense to pay the up-front cost of points in exchange for a lower rate. However, if you think you might pay off your mortgage early and thus not be paying interest for the entire loan period, paying points might not be such a good idea.
Courtesy of PDI Global. © 2011