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Which Mortgage Should I Choose?
Key Questions to Ask Yourself and Lenders
When Shopping for a Mortgage
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
initial 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 with an
adjustable rate loan.
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 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 solely on someone else’s recommendation. You, not your friend,
must feel comfortable with your lender. If you 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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