Choosing the best mortgage now
Mortgage rates have been
on the rise for the past month, but they're still at fairly low
levels historically speaking.
If you're in the market
for a new home, you figure it must be less expensive to buy now
than when rates go up even further, assuming housing prices stay
strong in the near term, something economists expect will happen.
That may be the only thing you can be sure about.
But finding the best type
of mortgage for your situation can feel a little like finding the
perfect ecru in a sea of beige.
It doesn't have to be that
way. If you ask yourself the right questions, you at least can narrow
your search to the best category of mortgage for which you need
to comparison shop.
15-year versus 30-year
The first question you should
ask is, "How much can I afford to pay on a monthly basis?"
Keep in mind, your mortgage
payment is only part of what you'll pay to live in your home. You
also should budget for furniture, your house's upkeep and the general
expenses of life (like, say, food).
A 30-year mortgage will
have a lower monthly payment and a higher interest rate than a 15-year
mortgage. So you'll have a smaller monthly obligation but you'll
pay more for your house over time because you're paying it off with
interest for a longer period.
Conversely, a 15-year mortgage
will have a higher monthly payment and a lower interest rate so
you'll pay less for your house because you're paying it off in a
"For most home buyers,
especially first-time buyers, taking a 15-year (or 20-year) mortgage
is out of the question," said Keith Gumbinger, vice president
for mortgage tracker HSH Associates. The higher monthly payments
are often too much to handle for these types of buyers.
But for home buyers with
sufficient income and a desire to be mortgage-free in a short time,
a 15-year loan might be a good bet.
Fixed versus adjustable-rate conundrum
The second question you
should ask is, "How long will you be in the house?" You
probably can't answer with absolute certainty, but you can play
Say, for example, you're
single and buying a small condo but you can easily envision yourself
married; or you've just started a family and plan to expand it at
some point. Chances are good you'll want to trade up to a new home
in five to seven years. On the other hand, maybe you've had your
family and want to settle into a place with a good school system,
which your kids will be using for the next 12 years.
Whatever the answer, it
will help you decide whether it makes sense to get a fixed-rate
or an adjustable-rate mortgage (ARM).
A fixed-rate mortgage locks
in a rate for the length of your loan.
ARMs, meanwhile, are short-term
fixed-rate loans: After the fixed rate term is up, the rate adjusts
at regular intervals in accordance with current interest rate conditions
at that time. A 5/1 ARM, for example, has a fixed rate for five
years and then adjusts every year for the next 25 years. (ARMs typically
run on a 30-year schedule.)
The length of the fixed-rate
term on an ARM typically can range anywhere from one month to 10
years. The longer the rate is fixed, the higher the interest rate
you'll get. But generally speaking -- and there have been exceptions
in the past -- ARMs will cost you less in the short-term. With the
ARM, both your monthly payments and interest rates should be lower
than either a fixed rate 15-year or 30-year mortgage.
The risk with an ARM is
that when interest rates rise, you could end up paying much more
than you bargained for. "You're subject to the vagaries of
the market," Gumbinger said. That's why in today's low-rate
environment, he noted, "You want to maximize the fixed-rate
picture to match your time frame."
If you know you'll be in
a home for 12 years or more, a 30-year fixed rate mortgage might
work better for you than, say, a 5/1 ARM, where you fix a rate for
five years and then it adjusts every year after that. But if you
think you won't be in the home longer than five or six years, a
5/1 ARM might make more sense.
Article continued at http://money.cnn.com/2003/06/24/pf/yourhome/q_bestmortgage/index.htm