Monday, May 7, 2012

Which loan is right for you?

Two Main Mortgage Types – Fixed & Adjustable

When selecting an appropriate mortgage, it generally comes down to two main choices. Fixed or adjustable. A timeless question to be sure.
Do you go with the relative safety of a 30-year fixed-rate mortgage, or do you try your luck with an adjustable-rate mortgage?
Well, the answer depends on your unique financial position, the state of the economy, and your own individual risk appetite.
If you’re the type that likes to play it safe, a fixed-rate mortgage is probably the best choice.
With a FRM, you won’t have to worry about the interest rate changing throughout the life of the loan, which means you won’t ever see your monthly mortgage payment increase.
This is certainly great peace of mind, but you do pay a bit of a price for it.
Currently, mortgage rates on 30-year fixed loans are hovering around 4%, while 5/1 ARMs are pricing about a percentage point lower.
That brings us to adjustable-rate mortgages. These days, most ARMs are in fact hybrid ARMs, meaning they’re fixed for a certain period of time before becoming adjustable.
One of the most popular ARMs is the 5/1 ARM, which is fixed for five years and adjustable for the remaining 25 years.
This means you get five years of absolute certainty, followed by 25 years of the great unknown.
Of course, you get a “discount” for taking on that risk, in the form of a lower mortgage rate. However, the big question is whether it’s worth it.
Again, this depends on a number of factors.

Some Reasons Why You Might Go With a Fixed-Rate Mortgage

  • You are risk-averse and don’t want to stay up at night worrying about your mortgage rate rising.
  • You can’t handle a larger monthly mortgage payment if your mortgage rate adjusts higher.
  • You plan to stay in your home for the long-haul and pay off your mortgage.
  • Mortgage rates are low so locking in a fixed-rate now will save you money long-term.

Some Reasons Why You Might Go With an Adjustable-Rate Mortgage

  • You don’t plan on staying in your home for a long time (you may move or upgrade).
  • You think mortgage rates may hold steady or drop in the future, allowing you to refinance to a lower rate later on.
  • You don’t want to pay off your mortgage because you think you can do better investing your money elsewhere.
  • Your interest rate could actually drop when it adjusts. Rates move up and down.

What Mortgage Term Do You Want?

Once you’ve decided on a fixed-rate or an adjustable-rate mortgage, you’ll need to decide on a mortgage term as well.
If you want to pay off your mortgage early, a 15-year fixed could be the best choice for conservative borrowers with deep pockets.
The payment will be significantly higher, but you’ll pay a lot less in interest and own your home free and clear a lot sooner.
If you’re not quite convinced an ARM is for you, take a look at longer-term ARMs, such as the 7/1 and 10/1 ARM, which are fixed for seven and 10 years, respectively, before becoming annually adjustable. That way you get the best of both worlds.
So there you have it – a primer on what mortgage you should pick and why.
Remember, this is a huge financial decision, and should go well beyond reading one article. Sit down and compare all available options. Do the math. Do your homework. Make a plan. And SHOP AROUND!