Research Mortgages before Shopping for a House

If you’ll be shopping for a home soon, consider including mortgage programs in your list of items to research. When it’s time to finance your purchase, you’ll be much more prepared to negotiate a loan that’s right for you.

The two most common types of mortgages are the 30-year fixed-rate loan and 15-year fixed-rate loan. Fixed-rate loans have interest rates and monthly payments that remain constant from year to year. The loans are attractive to homeowners who live on fixed incomes or who simply want the peace of mind knowing their monthly payments won’t change.

The one-year adjustable rate mortgage (ARM) has also become popular in the last few years. Most ARMs are fixed for a period of time and then increase by a certain amount at preset intervals. The one-year ARM has a fixed-rate for 12 months, while other ARMs, known as hybrid ARMs, have fixed-rates for three, five, seven and ten years, with annual rate adjustments thereafter. ARMs are attractive to borrowers who plan to stay in their homes only a short time. The initial fixed rate period can enable these borrowers to save money for their next home purchase.

30-year vs. 15-year loans
When deciding between a 30-year loan and a 15-year loan, borrowers should consider how much home they want to buy and how quickly they want to build equity.

Monthly payments are typically less for 30-year loans because the interest is spread out over a longer period of time. Though fixed-rate 30-year loans typically have higher interest rates than 15-year loans, they provide borrowers with a significant tax benefit. Mortgage interest is tax deductible thus borrowers can claim more interest each year, which reduces how much federal income tax they have to pay.

Fifteen-year loans, while they don’t provide as good a tax benefit as 30-year loans, are a great way for borrowers to quickly build equity in their homes. In addition to enjoying lower interest rates, borrowers also pay much less interest over the life of the loan because the loan term is shorter. This concept is illustrated well in the following example from Bankrate.com. Let’s say you take out a $150,000 mortgage at an interest rate of 6.64 percent for 30 years. Your monthly payment (principle and interest) would be $961. Over 30 years you’ll pay a total of $196,304 in interest. If you reduce your loan’s term to 15 years at the same interest rate, your payment would increase to $1,274, but you’d pay just over $79,000 in interest.

A potential disadvantage of a 15-year loan is the extra money homeowners have to pay each month. The borrower in the example must fork over an additional $300 a month, or $3,600 a year. Borrowers who consider 15-year loans should think about whether the extra money they’ll pay each month could be funneled into other more lucrative investments.

ARMs also enable borrowers to put any money they save during the initial fixed rate period into other investments. The low, fixed rate is particularly attractive to first time buyers who wish to forgo the less expensive starter house and jump right into big home. If you’re considering an ARM for a house you might not otherwise be able to afford with a fixed-rate mortgage, know how much your rates and payments can rise over the life of the loan. Ask your lender whether you have the option of converting the loan into a fixed-rate loan if interest rates begin to increase.

The Federal Trade Commission (FTC) offers tips for shopping for the best mortgage including a glossary of terms and a mortgage shopping worksheet.

 Article provided by CU Village.com through its Financial Resource Center content product.