Break down the home mortgage and determine the better one for you.
It’s a word and a concept that can strike terror in even the
most stouthearted of potential homeowners. With its often baffling intricacies
that determine how much more you do or don’t pay every month, it’s
a justifiable anxiety.
Take heart, for we have the 10 essentials you need to soothe your mortgage-addled
soul. In fact, the basics of mortgage loans are pretty easy to understand.
The rate remains the same
When you choose a fixed-rate mortgage, you’re assured your interest rate
will remain the same for the life of the loan.
- Loan Length. The life, or term of a mortgage is 30 years by industry standards,
but 15 and 20 year term loans are also available.
- Rate Reduction. Should you
opt for a shorter term loan, you can reduce your interest rate even further.
For example, a 15 year rate is typically
to one-half percent lower than one for 30 years. The smaller rate and shorter
term mean you’ll pay less over the life of the loan than if you borrowed
the same amount over a longer term.
- Monthly Money. Of course, the shorter
the loan term, the higher the monthly payments.
- Higher rates? Fixed-rate
mortgages protect you from the risk of rising interest rates. But you could
end up with a higher rate should interest
ARMed and Ready
The second major mortgage category is the adjustable rate, or ARM. Initially,
an ARM rate is lower than one that is fixed, about one-quarter to two points,
depending upon the economy.
- Larger Loans. With its lower preliminary rate, ARMs can help you qualify
for a larger loan or start off with smaller payments than with a higher fixed
- Rate Cap. Generally, ARMs have caps on how high it can adjust during
each adjustment period and over the life of the loan. This protects you from
market changes, but doesn’t offer the stability of a fixed rate loan.
Increases. ARMs are a good choice for someone who knows there income will
rise and at least keep pace with the loan rate’s periodic adjustment
- Moving On? If you plan to move in a few years and aren’t concerned
about the possibility of a higher rate, an ARM could be a good choice.
changes. When the first adjustment occurs (usually between six and twelve
months) and how often it adjusts depends upon the terms of the loan.
After the first adjustment, subsequent modifications can occur every six
months, once a year or longer. Should rates fall, so does your monthly payment.
- Rate Configurations. To come up with an ARM rate, the lender adds a “margin,” usually
two to four percentage points, to the index. Its interest rate adjusts up
or down, depending upon current economic trends and is based on a money market
index. The one year U.S. Treasury bill is commonly used because its yield
similar to the 30 year U.S. Treasury bill used to set rates on 30 year fixed