This is part II in our mortgage series: Finding the Right Mortgage. When helping a family determine the best option for their new or refinanced home, these are some of the most frequent questions that come up:
- Fixed vs adjustable rates (ARM) – In general, fixed rates are preferable because it means your principle and interest payments will not change over the life of the loan making it much easier to budget. That said, ARMs come in a variety of shapes and sizes – some of which don’t have interest rate adjustments until you’ve been in the home for 5 to 10 years. If you’re planning to sell the home within that time frame, you may wind up with a better interest rate in the short term. But of course, as mentioned above with FHA loans, you’re banking on being able to sell the house, refinance, or whether the adjustment to the interest rate, depending on how the market has adjusted since you purchased the house.
- Interest-only and balloon mortgages – These are the two options to avoid almost at all costs. There are still a few primary mortgages out there that are interest-only, but many second mortgages or home equity lines of credit have that option. It allows for a MUCH smaller payment (and therefore often allowing you to buy a MUCH bigger and more expensive home) but it is similar to paying rent – you’re never paying down the balance on the home. For mortgages set up this way, that generally means that there is a huge lump sum (often for the full mortgage on the home) due at the end of the term of the mortgage, whether that is 10 years, 15 years, or 30 years. Either you would have to be very financially savvy to have saved up funds or you would have to have good enough credit and income to refinance the home before the balloon comes due.
- 15- vs 30-year loans – Should you opt for the slightly lower APR and higher payments with a 15-year loan or stretch it out to 30? Financial advisors have debated this one, and both sides of the argument have good points. A 15-year mortgage requires you to pay a higher payment, but gets paid off much sooner and is cheaper in the long-run. Those who propound the benefits of the 30-year say that if you make an extra payment every few months (say by paying a half-mortgage payment every other week when you get your paycheck or using a third paycheck in a month to make an extra payment), you’ll shorten the term of the mortgage. But if you have a difficult month you’re not obligated to pay the higher payment required with a 15-year. Let’s take a quick example: Let’s say you’re financing $200,000 on a home and you’ve been approved for the going rate of about 3.85% interest (APR). Insurance and taxes are figured separately, so the numbers below are only for the principle and interest on the loan:
- 15-year loan – monthly payments = $1,464, total interest paid over 15 years = $63,590
- 30-year loan paying only minimum payments – monthly payments = $938, total interest paid over 30 years = $137,542
- 30-year loan paying an extra payment a year – shortens mortgage to 20 years, total interest paid over 20 years = $102,667
The right option is different for each family and each situation, but having the knowledge of your options and the pro’s and con’s of each is invaluable!
Apprisen offers first time homebuying counseling and education. Our housing counselors will explain the home purchasing process step-by-step. Call 1-800-355-2227 or visit our website for more information.