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The
right loan for you
Morris Digital Works Wire Service
Now that you've decided to buy a house, the question is how? Which
loan is right for you.
There are several kinds of loans. The most common are a fixed-rate
mortgage and adjustable rate mortgages (ARM).
A fixed-rate mortgage is the traditional way of financing a house.
It simply means that the rate stays the same for the life of the
loan, usually 15 or 30 years. The advantage to a fixed-rate mortgage
is that the monthly rates will stay the same. However, if you lock
in your rate when interest rates are high, your rate will not go
down if interest rates should fall.
A 30-year fixed-rate mortgage is recommended for people who plan
to stay in their house for a number of years and are looking for
security. A 30-year mortgage takes longer to build up equity in
your home but it keeps the monthly payments low.
A 15-year fixed-rate mortgage pays off your loan in 15 years. The
payments are higher per month, but equity is acquired quickly. These
loans are recommended for those planning to sell their house in
a few years but still want a stable rate.
Adjustable rate mortgages have a rate that changes periodically.
The rate is usually linked to a financial index, such as a Treasury
security, so the rate can vary over the life of the loan, which
usually lasts 25 to 30 years.
ARMs usually have lower monthly payments than fix rate mortgages,
to start with. This makes them attractive to many home buyers. However,
it is a gamble to have an ARM. Should interest rates go up, the
lender could raise rates up to 2-percentage points per year, up
to 6-percentage points during the life of the loan. This means if
you start out with a rate of 6 percent, it could jump to 12 percent
in just three years.
There are caps that can be placed on ARMs. One cap can be put on
the amount the rate can jump in one year, and a second cap can be
placed on the rate over the life of the loan.
ARMs are advantages during recessions when interest rates are low,
but if the economy turns around they can also be a burden. There
are two major things to consider when thinking about taking the
ARM route. First, how long do you plan to remain in your home? Second,
what direction do you see interest rates headed?
ARMs are great for people thinking about only staying in a home
for a short period of time, when interest rates are low or may drop.
In these instances, buyers will probably be able to save some money.
Conversely, if you plan to stay in a home for a long period of time
or if interest rates are high or are rising, a fixed-rate mortgage
would not be the way to go.
There are a couple other types of mortgages to choose from. One
is a convertible loan. This is an ARM that can be converted to a
fixed-rate mortgage after a specified number of years. There is
usually a cost associated with this process.
Finally, the last loan is a balloon mortgage. This is one way of
shortening the length of your mortgage. It works like an ARM or
a fixed-rate mortgage for the first several years. After a specified
period of time, you owe a large payment, in some instances this
is the remaining balance of the loan. The advantage here is that
it keeps monthly payments low. This type of loan is recommended
to people who are planning on selling their home within a few years.
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