Which
Mortgage Should I Choose?
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Traditional Fixed Rate
Mortgage? Graduated-Payment Mortgage? Adjustable Rate
Mortgage? FHA Mortgage? Two-Step Mortgage?
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 be
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.
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.
Loan Approval
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.
Lender Reputation
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.
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