There can be no question that finding the perfect home is an important decision. But don’t over look the other half of the American dream equation and forget about the importance of the right home mortgage. Picking the wrong financing can quickly turn your dream home into a night mare you can’t afford.
In its simplest terms, a home mortgage is nothing more than the amount you need to borrow in order to purchase your home. Usually, it is the difference between the purchase price and the down payment plus closing costs you may incur to complete the transaction. In most cases the money borrowed is a considerable amount. It is imperative for you the borrower to understand what you can afford over the long term. We’re talking about an obligation that can spread over decades not a three year auto loan. Your thought process needs to be adjusted accordingly.
Without question, the first decision that needs to be made is which type of home mortgage is most appropriate for your financial situation, fixed rate or Adjustable. With a fixed rate mortgage you know what you are going to be expected to pay every month. Your payment will never increase or decrease over the life of the mortgage. While adjustable rate home mortgages begin with a low teaser rate and payment. Over the long run they tend to surpass the rate/payment of the fixed.
Fixed Rate Home Mortgage
If stability of payment is what’s important to you? Knowing that no matter what may happen in the future. Your mortgage payment will remain the same, then this is your mortgage. Consider your monthly budget a piece of cake. But since the lender is taking on the future risk of economic uncertainty and making a long term commitment, usually thirty years. You should expect to have a higher rate than if you were to take an adjustable home mortgage. That only seems fair. Doesn’t it?
Adjustable Rate Home Mortgage
These mortgages are well suited for borrowers that do not have an aversion to risk and may not necessarily view a home purchase in a long term sense. If you don’t plan to own you home for seven years or more than an adjustable rate home mortgage that offers a better rate over the term you expect to remain in the property could save you a ton of money. What is problematic is that most people don’t usually live their lives to such time schedules and that could lead to big problems down the road. Since you are taking on the uncertainty of the future you should receive the benefit of a lower rate.
The way to game the system so to speak is to get an adjustable home mortgage that has a fixed quality for only the term you expect to stay in the property. For example, you intend to remain in your new home for five years. Today you have the option of a 30 year fixed home mortgage at 6% or a 5year ARM that is fixed for the first 5 years at 4.5% and then adjustment period kicks in. So a $100,000 fixed loan at 6% gives you monthly payment of $599.55 whereas the 4.5% ARM has a payment of $506.69. That’s a savings of $92.86 every month and over a 5 year period equals $5,571.60. Not bad . The catch is you now either have to move on to another property, pay off the mortgage in full, or refinance at a rate that is at 6% or better.
There are many considerations that need to be taken into account with an adjustable rate home mortgage. Things like margins, caps and indexes that you need to be informed about. They will be dealt with in future posts. First you need to decide whether the security of a fixed rate home mortgage is more in line with your needs or maybe an adjustable home mortgage is perfect for you.
