Consult a Lending Professional for all your options
One of the most important steps in buying a home is determining what kind of mortgage is right for you. After all, a mortgage is a financial commitment that will last for many years. Make sure you select a mortgage that matches your risk tolerance and financial situation.
Fixed rate mortgages
With a fixed rate home mortgage, the interest rate and monthly payments stay the same for the life of the loan.
These home loan mortgages are usually fully amortizing, meaning that your payments combine interest and principal in such a way that the loan will be fully paid off in a specified number years. A 30-year term is the most common, although if you want to build equity more quickly, you might opt for a 15- or 20-year term, which usually carries a lower interest rate. For home buyers seeking the lowest possible monthly payment, 40-year terms are available with a higher interest rate.
Consider a fixed rate mortgage if you:
- are planning to stay in your home for several years.
- want the security of regular payments and an unchanging interest rate.
- believe interest rates are likely to rise.
Adjustable rate mortgages (ARMs)
With an adjustable rate mortgage (ARM), the interest rate changes periodically, and payments may go up or down accordingly. Adjustment periods generally occur at intervals of one, three or five years.
All ARMs are tied to an index, which is an independently published rate (such as those set by the Federal Reserve) that changes regularly to reflect economic conditions. Common indexes you’ll encounter include COFI (11th District Cost of Funds Index), LIBOR (London Inter bank Offered Rate), MTA (12-month Treasury Average, also called MAT) and CMT (Constant Maturity Treasury). At each adjustment period, the lender adds a specified number of percentage points, called a margin, to determine the new interest rate on your mortgage. For example, if the index is at 5 percent and your ARM has a margin of 2.5 percent, your “fully indexed” rate would be 7.5 percent.
ARMs offer a lower initial rate than fixed rate mortgages, and if interest rates remain steady or decrease, they may be less expensive over time. However, if interest rates increase, you’ll be faced with higher monthly payments in the future.
Consider an adjustable rate mortgage if you:
- are planning to be in your home for less than three years.
- want the lowest interest rate possible and are willing to tolerate some risk to achieve it.
- believe interest rates are likely to go down.
Consultation and research are your best tools when doing research for a real estate purchase. Home buyers can save a lot of money by asking for mortgage costs quotes from different loan brokers who specialize in real estate transactions.
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