Choosing the Best Mortgage for You
- posted 7.31.2012
- Rosemarie Pirio
- Home Loans
Do you have the knowledge to choose the best mortgage for you? While you may know a lot, it's likely that you don't know everything about mortgages, and that's ok as long as you're working with a professional that you trust. However, there are some questions you can ask yourself that will help point you in the right direction, whether you're looking to buy a new home or refinance.
- How long do you plan to stay in your home?
- Where are interest rates heading?
- Is your goal to build equity in your home?
- Do you see your financial situation changing in the next couple of years?
- Do you mind taking on a bit of risk and change, or prefer predictability?
How Long Do You Plan to Stay in Your Home, How Do You Feel About Risk, and Where Do You See Yourself in the Future?
If you plan on staying in your home seven years or less, then an Adjustable Rate Mortgage (ARM), also known as a flexible or variable rate loan, may be a viable option for you. ARMs often offer an extremely low introductory interest rate that lasts for a fixed amount of time, commonly 3, 5 or 7 years, and then the interest rate "adjusts" to market rates.
The main benefit for many when choosing to go with an ARM, is the low initial interest rate and monthly payment. If you expect to earn more money in the future, but are not yet where you would like to be, this takes some pressure off until you reach your financial goals, and still allows you to buy a home. Or maybe you've been hit with hard-times; a low payment might be very beneficial until you get back on your feet.
However, practice some caution as one drawback is that more than likely the interest rate will fluctuate and adjust to market rates after the fixed introductory period has ended. This means your rate could increase dramatically, thereby increasing your monthly mortgage payment. The potential positive of the interest rate adjusting, is that you might get an even lower rate should market rates decrease.
If you're the committed kind and plan on staying for 10 years or more, a 10 Year ARM or a 15, or 30 Year Fixed Rate Mortgage may be worthy options.
With Fixed Rate Mortgages, you can rest assured that regardless of the financial market, you will be paying your agreed upon interest rate and mortgage payment specified in your contract. Most of the time with Fixed Rate Mortgages, you have a higher interest rate relative to market interest rates, as the lender must offset the fact that market interest rates might increase. However the reverse does apply to you, if interest rates drop you will still be locked in at the higher rate. In this case, you may consider refinancing to get the lower rate.
If you like predictability when it comes to money, I'm right there with you! I'm not much of a risk taker and I am more comfortable knowing that my interest rate will not fluctuate with the financial market. Choosing a Fixed Rate Mortgage may be your best bet.
What Would Be a Good Option to Build Equity in Your Home?
To build equity in your home, some good choices would be a 10, 15 or 20 year fixed rate mortgage. You'd pick this type of mortgage because it allows you to build the equity in your home faster than other mortgage products available. Every month as you make your payments you increase your equity. As you owe a little less, you own a little more.
When you build equity, you are increasing the net value of your asset (equity) and are increasing your net worth.
Do You Expect Interest Rates to Dramatically Change in the Near Future?
Do a little bit of research, and depending on what you find, this may help when choosing a loan. Also talk to your mortgage professional about the market and get their insight. If you think rates will increase, it might be a good time to get in a 30, 15 or 10 Year Fixed Rate Mortgage before this happens.
If you think interest rates are going to fall, you might consider a short term ARM for now, and then try taking advantage of the lower rates down the road.