Fixed rate mortgages
You pay a predetermined interest rate for the duration of the
mortgage. You generally have a choice of a 15- or 30-year mortgage
(though terms may vary to meet your needs). You pay more interest
over the term of the 30-year mortgage but your monthly payments are
lower. With the 15-year mortgage, you have higher monthly payments
but you build up the equity in your home much sooner.
Note:
It's generally easier to get approved for a 30-year
mortgage. In addition, you can buy a more expensive home with a
30-year mortgage than a shorter-term mortgage because with loan
payments of equal size, you can borrow more.
Adjustable rate mortgages (ARMs)
With an ARM, the interest rate stays fixed for the
initial loan term, then adjusts up or down based on a specified index rate. The rate and monthly payment change once
every 6 or 12 months with most ARMs. ARMs usually come with initial rates one to three percentage
points below those of 30- and 15- year fixed-rate loans. There are
several questions you should ask your lender before getting an ARM:
How is the rate figured? The rate you pay on an ARM is based on the selected index rate plus a fixed extra amount called a margin. For example, if the index rate is 5% and your margin is 2.5%, your interest rate will be 7.5%. Find out what index your lender uses and what the margin is.
How often can monthly payments change? Depending on the program, your monthly payments can move up or down monthly, twice a year or annually. Most ARMs allow only annual payment changes.
Does the ARM include caps? Most ARMs have limits (caps) that restrict the size of the interest rate or monthly payment changes.
Is the ARM convertible? Some ARM programs allow you to convert from an adjustable rate to a fixed rate and payment.
Are there any pre-payment penalties? Many ARM programs allow you to pre-pay your loan in whole or in part without penalty.
Balloon Loans
A balloon loan has a large remaining balance at the end of the loan term — sometimes almost as much as the original loan amount. Balloon loans often have short terms between three and five years and can be risky if you do not have enough cash or cannot refinance in time to repay the debt.
Points
Mortgage price tags come in two parts. One cost is the interest rate; the other is points. A point is equal to one percent of the mortgage amount. With a $100,000 mortgage, one point would be worth $1,000. Generally, if you pay more points, you'll have a lower interest rate, or if you pay fewer points you'll have a higher interest rate. To determine which option is best for you, you'll need to estimate how long you'll own the home and decide the amount of the extra points by the dollar amount you would pay additional each month with the higher rate.
For example: You can pay one point ($1,000) at closing or no points, but $18 more each month because of a higher interest rate. If you own for more than 4½ years, the higher up-front payment actually represents the better deal ($1,000 divided by $18 equals 55.55 months or 4.5 years).
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