More and more banks, credit unions and mortgage brokers are finding creative ways to help you afford the home of your dreams. With all of the financing options and terms, it can be a bit confusing figuring out which one is right for you. Here is some help for choosing the right home mortgage.
Selecting a Mortgage
There are two ways to approach selecting a mortgage. The first is to determine what kind of monthly payment you can afford or want to have for the property. If this mortgage is a way to finance your primary residence, then that figure will realistically be between 10 and 28 percent of your total monthly income.
Once you have determined what that magical figure is then you will need to deduct the monthly amount for property taxes and homeowners insurance from that number. Tax rates can vary greatly from region to region, but the bank or mortgage broker can help you find out what yours will be for a specific property.
Find the Best Rates
The second way to approach mortgage selection is to shop around for the best interest rates. The interest rate is the percentage you will pay to borrow a specific dollar amount to finance the property.
Sometimes there will also be an Annual Percentage Rate (APR) that differs from the published interest rate. This slightly higher rate is the actual cost of the loan and often takes into account the financing of closing costs or pre-paid percentage points that get you a lower overall rate.
The average mortgage is paid over either 15 or 30 years. The lower the amount of time you plan to finance the purchase, generally the better the interest rate. To make getting into a home more affordable, lenders will often offer products such as Adjustable Rate Mortgages (ARMs) where you pay a fixed lower rate (and lower payment) for 1, 3, 5 or 7 years and then the interest would adjust to the going rate in the 2nd, 4th, 6th, or 8th year, depending on which ARM you choose.
The shorter the ARM usually means the lower the rate. However, there is a greater risk that you could be facing a much higher interest rate when it adjusts. These are good products for people who know their income may increase significantly during that time, or if they know they will sell the property in just a few years. There are also caps on the amount an ARM can go up in a given year and over the whole life of the mortgage loan.
Those who plan to buy a home and stay there forever are usually better off with a fixed interest rate. This rate will remain the same, along with the payment of Principle and Interest (P&I) for the entire lifetime of the loan, either 15 or 30 years. This same type of person could benefit by paying points. This allows the purchaser to in a sense pre-pay some of the interest based on the amount borrowed against the property to get a lower interest rate for the long term.
Generally anyone planning to keep a property for more than 5-7 years can benefit by paying points. Most point options include paying between .5 and 2.5 points. So if the amount to be borrowed is $100,000 and you plan to pay 2 points, then at closing you would pay an extra $2000. This could potentially save the borrower tens of thousands of dollars in interest payments by lowering their interest rate for the next 30 years.