Thursday, October 29, 2009

What type of Mortgage should I take for my House?

Post by David Held

When purchasing a home there are many things to consider, the location, the asking price, the taxes, and most especially the type of mortgage you can get. When considering a mortgage there are many things that come into question, what is the loan to value ratio, how much interest will I be paying, can I afford the mortgage payments, do I need to put down any points, and what type of mortgage is it (Fixed Rate or ARM)?

There’s a huge difference between a fixed rate mortgage and an adjustable rate mortgage. First of all the interest rate for an adjustable rate mortgage starts off lower than a fixed rate mortgage. This sometimes could be considered a teaser rate, which means that you have to be careful because your interest rate will spike at a certain time. An ARM puts the market risk on the borrower because he is betting that the interest rates say lower than the fixed rate in a fixed rate mortgage, but most of the time this is not the case. The borrower must evaluate/analyze the economy because if he jumps into an ARM. If interest rates spike, he will be paying a lot more than expected, thus having a greater chance to default. If one defaults on a mortgage their credit rating will drop tremendously and they will have a tough time getting another loan.

The safe option, unless you know exactly what the market is going to do, is a FRM because all the risk is on the lender. If the economy starts thriving and you are missing out on a lower interest rate, than there is always the ability to refinance (if it’s cost efficient).

Source #1, #2, #3

1 comment:

  1. This is a very interesting and useful article. However, I still think college students might be safer off choosing GPMs as I suggested in my article.
    -Shawn Chandok