Choosing A Mortgage Program
There isn't a single or simple answer to this question. The right type of mortgage
for you depends on many different factors:
Your current financial picture.
How you expect your finances to change.
How long you intend to keep your house.
How comfortable you are with your mortgage payment changing.
For example, a 15-year fixed-rate mortgage can save you many thousands of dollars
in interest payments over the life of the loan, but your monthly payments will be
higher. An adjustable rate mortgage may get you started with a lower monthly payment
than a fixed-rate mortgage -- but your payments could get higher when the nterest
rate changes. The best way to find the "right" answer is to discuss your
finances, your plans and financial prospects, and your preferences frankly with
a mortgage professional.
Fixed Rate Mortgages
The most common type of mortgage program where your monthly payments for interest
and principal never change. Property taxes and homeowners insurance may increase,
but generally your monthly payments will be very stable. Fixed-rate mortgages are
available for 30 years, 20 years, 15 years and even 10 years. There are also "bi-weekly"
mortgages, which shorten the loan by calling for half the monthly payment every
two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months"
worth, every year). Fixed rate fully amortizing loans have two distinct features.
First, the interest rate remains fixed for the life of the loan. Secondly, the payments
remain level for the life of the loan and are structured to repay the loan at the
end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.
During the early amortization period, a large percentage of the monthly payment
is used for paying the interest . As the loan is paid down, more of the monthly
payment is applied to principal . A typical 30 year fixed rate mortgage takes 22.5
years of level payments to pay half of the original loan amount.
Adjustable Rate Mortgages (ARM)
These loans generally begin with an interest rate that is 2-3 percent below a comparable
fixed rate mortgage, and could allow you to buy a more expensive home. However,
the interest rate changes at specified intervals (for example, every year) depending
on changing market conditions; if interest rates go up, your monthly mortgage payment
will go up, too. However, if rates go down, your mortgage payment will drop also.
There are also mortgages that combine aspects of fixed and adjustable rate mortgages
- starting at a low fixed-rate for seven to ten years, for example, then adjusting
to market conditions. Ask your mortgage professional about these and other special
kinds of mortgages that fit your specific financial situation.
Standard ARMS and the Differences
A few options are available to fit your individual needs and your risk tolerance
with the various market instruments. ARMs with different indexes are available for
both purchases and refinances. Choosing an ARM with an index that reacts quickly
lets you take full advantage of falling interest rates. An index that lags behind
the market lets you take advantage of lower rates after market rates have started
to adjust upward. The interest rate and monthly payment can change based on adjustments
to the index rate.
6-Month Certificate of Deposit (CD) ARM
Has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate
of Deposit (CD) index is generally considered to react quickly to changes in the
market.
1-Year Treasury Spot ARM
Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury
Spot index generally reacts more slowly than the CD index, but more quickly than
the Treasury Average index.
6-Month Treasury Average ARM
Has a maximum interest rate adjustment of 1% every six months. The Treasury Average
index generally reacts more slowly in fluctuating markets so adjustments in the
ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
Has a maximum interest rate adjustment of 2% every 12 months. The treasury Average
index generally reacts more slowly in fluctuating markets so adjustments in the
ARM interest rate will lag behind some other market indicators.