Shopping for Your Loan Part Four

Shopping for your loan - Part Four

In the first three articles about shopping for you home loan, we’ve covered a bunch of information that might have been unfamiliar to you.  We are going to continue in this edition with what types of loans are available.  As you read through this, take into account your particular situation, and begin to evaluate what information applies to you. 

What types of loans are availble? What are the advantages or disadvantages to each type of loan?

A is a home loan where the principle and interest payments remain the same for the life of the loan.  There are 15-year and 30 year terms.  Your payments are predictable through the life of the loan.  Your monthly housing cost isn’t affected by any interest rate changes or inflation.  If you choose a 30year loan, for the first 23 years, more interest is paid that principle.  This translates to larger tax deductions, as the mortgage interest you pay is tax deductible.  On a 15-year loan, the interest rate is usually slightly lower than a 30-year loan.  Your equity in the property builds faster because your payments in the early years of the loan hit more of the principle than they will with a 30-year mortgage.

An adjustable rate mortgage, also called ARMs, have variable or changing interest rates, so your payments can either or increase or decrease depending on those changes.  The interest rates are subject to increase limits set up in your mortgage loan.

There are three types of ARMs; the balloon mortgage, the two-step mortgage and ARMs linked to a specific index or margin.  The balloon mortgage typically offers very low rates for the initial time frame.  This could be the first five, seven or ten years of the loan.  These terms will again be spelled out in your mortgage.  When the initial period is over, the balance on your mortgage is due.  The two-step mortgage has an interest rate that adjusts only once and then remains the same for the length of your loan.  If you choose an ARM that is linked to an index your payment will change as the interest rate changes. Usually lenders will use an index that includes the activity of one, three or five year Treasury securities.  If your ARM is linked to a margin, it basically functions like the lender’s markup.  It represents the lender’s cost of doing business plus the profit they will make on your loan.  The margin will be added to the index rate to calculate your total interest rate.

What are some advantages to ARMs?  They will generally offer lower initial interest rates.  Sometimes, your initial monthly payments may be lower and they may allow a borrower to qualify for a larger loan.

Does an adjustable rate mortgage (ARM) make sense for you?

If you are confident that your income will increase and will be able to cover increasing mortgage payments, then an ARM may make sense for you.  If you anticipate moving in the near future and aren’t worried about increasing interest rates or decreasing property values, this might be an option you want to explore with your lender.  Choosing an ARM loan may affect your ability to pay your mortgage in the future, so you need to educate yourself with the features of ARM products in order to decide if it suits your situation.

What happens if the interest rates on your loan decrease and you have a fixed rate loan?

You will want to decide if it’s beneficial for you to refinance your existing home loan if interest rates drop significantly.  If you plan to be in your home for at least a year and a half and can get a rate reduction of at least 2 percent, refinancing might be a good option.  Keep in mind, that refinancing involves many of the same fees paid at the original closing of your home.