Picking the Right Mortgage There are so many different mortgage products on the market today that it can be very confusing for any consumer, let alone a first-time home buyer to choose. Some mortgages, like option ARMs can be extremely complicated. The good news is that we live in a time where there are so many choices that borrowers have a better opportunity to get a product that is a perfect fit for their current financial state and needs. However, the wrong choice can be disastrous. So be sure to do your homework first and then work with a reputable mortgage lender than help you make the right educated decision.
Fixed-Rate Mortgage
A fixed-rate mortgage is a simple amortizing mortgage with a monthly payment that will remain approximately the same every month. Generally, borrowers can get approved for a 15-year or 30-year mortgage depending on how fast they want to pay off their home and how much they can afford in monthly payments. The rate will never change for the life of the mortgage, which can be great if you get a fantastic rate. However, if the interest rates go down, your payments will still remain the same rather than be lower. A fixed-rate mortgage is a good choice if you are worried about rising payments and plan on staying in your home for more than five years.
Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) generally has a fixed rate for three to five years and then the payments adjust depending on a current index plus a margin. An index is a guide that lenders use to measure interest rate changes. The margin is basically the lender’s markup. An ARM can be a great loan if you are certain that you will be selling your house before the fixed-rate period ends. The initial interest rate is lower than that of a fixed-rate mortgage, which could help you qualify for a larger loan or smaller payments. An adjustable-rate mortgage can be a much bigger gamble, however if you plan on staying in your new home indefinitely. The payments could increase significantly if the interest rates rise.
Option Adjustable Rate Mortgage
An option ARM is an adjustable rate mortgage that allows consumers to choose four different types of monthly payments. Payments can be interest only, fully amortizing over 30 years, fully amortizing over 15 years, or a minimum 1% payment for the first twelve months. The minimum payments, however, gradually increase over the first five years. The problem with these loans is that if you make interest only payments you aren’t building any equity. Worse, if you are making the minimum payment, you may not even be making the interest and therefore increasing your debt instead of working away at the principal. The risks are higher with an option ARM than with many other loans. You can ultimately end up owing more on your home than you originally borrowed. However, there are a few situations where an option ARM makes great sense. If you are sure that your income will be increasing, for example, you’re an intern soon to be a doctor, you can get into a home in that great neighborhood and still be able to make the payments when they increase. If you have variable income, say you depend on big bonuses at the end of the year, then an option ARM can give you the flexibility of making smaller payments at the beginning of the year and taking a chunk out of the principal when you get your bonus.
Whichever mortgage seems to make the best sense to you, be sure to educate yourself on the products available. Your mortgage payment will be your most important monthly payment. Make sure you are prepared and choose wisely.
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