Choosing the best mortgage nowMortgage
rates have been on the rise for the past month, but they're still at fairly low
levels historically speaking.
If you're in the market for a new home,
you figure it must be less expensive to buy now than when rates go up even further,
assuming housing prices stay strong in the near term, something economists expect
will happen. That may be the only thing you can be sure about.
But finding
the best type of mortgage for your situation can feel a little like finding the
perfect ecru in a sea of beige.
It doesn't have to be that way. If you
ask yourself the right questions, you at least can narrow your search to the best
category of mortgage for which you need to comparison shop.
15-year
versus 30-year debate The first question you should ask is, "How
much can I afford to pay on a monthly basis?"
Keep in mind, your
mortgage payment is only part of what you'll pay to live in your home. You also
should budget for furniture, your house's upkeep and the general expenses of life
(like, say, food).
A 30-year mortgage will have a lower monthly payment
and a higher interest rate than a 15-year mortgage. So you'll have a smaller monthly
obligation but you'll pay more for your house over time because you're paying
it off with interest for a longer period.
Conversely, a 15-year mortgage
will have a higher monthly payment and a lower interest rate so you'll pay less
for your house because you're paying it off in a shorter period.
"For
most home buyers, especially first-time buyers, taking a 15-year (or 20-year)
mortgage is out of the question," said Keith Gumbinger, vice president for
mortgage tracker HSH Associates. The higher monthly payments are often too much
to handle for these types of buyers.
But for home buyers with sufficient
income and a desire to be mortgage-free in a short time, a 15-year loan might
be a good bet.
Fixed versus adjustable-rate conundrum
| The second question you
should ask is, "How long will you be in the house?" You probably can't
answer with absolute certainty, but you can play the odds. Say, for example,
you're single and buying a small condo but you can easily envision yourself married;
or you've just started a family and plan to expand it at some point. Chances are
good you'll want to trade up to a new home in five to seven years. On the other
hand, maybe you've had your family and want to settle into a place with a good
school system, which your kids will be using for the next 12 years.
Whatever the answer, it will help you decide whether it makes sense to get a fixed-rate
or an adjustable-rate mortgage (ARM).
A fixed-rate mortgage locks in
a rate for the length of your loan.
ARMs, meanwhile, are short-term
fixed-rate loans: After the fixed rate term is up, the rate adjusts at regular
intervals in accordance with current interest rate conditions at that time. A
5/1 ARM, for example, has a fixed rate for five years and then adjusts every year
for the next 25 years. (ARMs typically run on a 30-year schedule.)
The
length of the fixed-rate term on an ARM typically can range anywhere from one
month to 10 years. The longer the rate is fixed, the higher the interest rate
you'll get. But generally speaking -- and there have been exceptions in the past
-- ARMs will cost you less in the short-term. With the ARM, both your monthly
payments and interest rates should be lower than either a fixed rate 15-year or
30-year mortgage.
The risk with an ARM is that when interest rates rise,
you could end up paying much more than you bargained for. "You're subject
to the vagaries of the market," Gumbinger said. That's why in today's low-rate
environment, he noted, "You want to maximize the fixed-rate picture to match
your time frame."
If you know you'll be in a home for 12 years
or more, a 30-year fixed rate mortgage might work better for you than, say, a
5/1 ARM, where you fix a rate for five years and then it adjusts every year after
that. But if you think you won't be in the home longer than five or six years,
a 5/1 ARM might make more sense.
Article continued at http://money.cnn.com/2003/06/24/pf/yourhome/q_bestmortgage/index.htm
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