Which Mortgage Should
I Choose? Key Questions to Ask Yourself and Lenders When Shopping for a
Traditional Fixed Rate Mortgage? Graduated-Payment
Mortgage? Adjustable Rate Mortgage? FHA Mortgage? Two-Step
You are wondering which kind of mortgage is best. The answer: There
is no one correct answer. Deciding which type of mortgage will best
fulfill your needs can be difficult. There are so many types of loans
and different term lengths. Your choice is extremely important and can
take some time and effort to research. While often neglected by
homebuyers, a little research before choosing your mortgage can save you
thousands of dollars in the long run.
There are several elements of a loan that should be analyzed. While
one of these elements may suggest one type of loan, another may call for a
different type. You must weigh each ingredient separately and
collectively. You will find that your answers to the questions below
will ultimately determine the type of mortgage that best fits your needs.
How long do you plan to stay in this home?
Five years? Ten years? Thirty years? The length of time
you will be in the home will certainly play a part in determining which loan
to apply for. If you only plan to be in the home for 5-7 years or less,
you should seriously consider an adjustable rate loan. If you intend on
staying 20-30 years, a fixed rate mortgage may be right for you.
How much risk are you willing to accept?
If you are the type of buyer that needs to know exactly what you will be
paying each month for the term of the mortgage, a fixed rate mortgage will
fulfill this need. The fixed rate loan, however, will also net a higher
interest rate. If you are willing to take some risk of fluctuations in
the interest rate, you may be able to receive a lower interest rate.
What are your income expectations?
Plan for the future. Do you anticipate a gradual or dramatic increase
in your income in the next few years? If you expect a big increase, a
graduated payment mortgage may be best for you.
How much cash do you have available for upfront costs?
If you have the resources, you may want to make a larger down payment to
lower your monthly payment. By keeping a higher monthly payment however,
you might be able to shorten the term of the loan to a 15-year loan in order
to pay it off quicker.
Keep in mind that you'll have closing costs and fees to pay in addition to
your down payment. If you don't have much cash saved for your upfront
costs, don't despair. You may need to accept a higher monthly payment or
even lower your monthly obligation by choosing an adjustable rate mortgage.
In addition to choosing a type of loan, you must also consider which lender
to use. Once again, several factors will influence your decision.
Annual Percentage Rate (APR)
This is most likely the best way to make an "apples-to-apples" comparison
of lenders. The APR reflects the cost of credit on a yearly rate and
includes any points and fees in addition to the interest rate.
Find out the rate the lender will commit and how long the lender will
guarantee it. Get any commitments in writing. As with any
transaction, if it isn't in writing it doesn't exist.
Points and fees
These factors will vary greatly. Look out for hidden fees. Make
sure the lenders disclose all fees; ask what they charge and what is included
and what is not.
Both approval and funding time should be considered. You don't want
to lose a prospective home because your lender takes weeks to fund your loan.
A lender should be able to fund the loan within ten days.
Don't rely on solely someone else's recommendation. You, not your
friend, must feel comfortable with your lender. If you do feel good
about your lender and trust him , it will be much easier to trust his advice
on what kind of mortgage will best suit your needs.