Evaluating Mortgage Types
Finding a mortgage can be a strenuous process. Not only are there hundreds of institutions offering mortgages, it can seem as though there are dozens of different types of mortgages themselves. Different interest rates, different lengths and other features can be confusing.
As you shop your options, keep two thoughts in mind:
- How long do you expect to live in the home?
- What is your tolerance for monthly payments increasing?
The benefit of a shorter 15-year mortgage is that after 15 years you will have paid off the mortgage loan, and you own your home free and clear. You will also pay less interest over the life of the mortgage. The trade off is that your monthly payments will be higher.
|15 Year Mortgage||30 Year Mortgage|
|Total monthly payments over
the term of the mortgage
|Total principal paid over the
term of the mortgage
|Total interest paid over the
term of the mortgage
Adjustable rate mortgages are attractive because of their lower initial rate. Your risk is that your rate and monthly payment will rise in the future. If you are comfortable that you can accept an increased payment or if you think you will be moving in a relatively short time, the savings with an ARM can be substantial.
- Initial rate. Be careful if the initial rate seems real low. It could be a "teaser" rate that only lasts for a short time and then the rate is adjusted upward. At a minimum, ask what the rate would be adjusted to if the initial rate ended today.
- Benchmark the ARM is pegged to. ARM rates are usually tied to some "published" index that reflects the general interest rate market. Usually the ARM rate is adjusted to that benchmark plus some level of margin. Ask your mortgage banker how this works and try to get an understanding of how the benchmark rate has changed recently.
- The cap. Most ARMs have limits on how much the rate can rise in any one year, and some ARMs have a limit on how high the rate can rise over the life of the mortgage. Understanding how the caps work will give you an idea of what you will be facing if rates rise substantially.
- Length of the rate periods. When you look at ARMs, you may find there are terms like 10/1, 7/1, 4/1 and the like. These refer to how long the initial rate lasts and how often the rate is adjusted after that.
Home Loan Types to Watch Out For