Selecting the Mortgage that's Best for You
Given the many different categories of mortgages, deciding on the perfect one for you can be a very tricky process. While only you can decide what you can or can’t afford, a loan officer’s knowledge and expertise can be an invaluable asset to you. Below are some brief definitions of different types of mortgages for which you may be able to qualify.
One of the first things you will need to determine is the amount of time you plan on spending in your new home. If you plan on being there only for a short time, closing costs may be your primary concern. On the other hand, if you want to stay there for many years, you will probably be more heedful about the interest rate.
With a fixed rate mortgage, your payments stay exactly the same every month, regardless of market fluctuations. As a result, the interest rate is usually higher. This type of mortgage has the obvious advantage of allowing you to calculate your monthly expenses with a high degree of certainty.
Sometimes, however, this is not your chief concern. Maybe you plan on moving in a few years, and are therefore not as concerned with possible increases in premiums. Perhaps it is more important to you that you have a lower initial interest rate when buying your new home. Possibly you are confident your income will increase enough in coming years to handle potential increases in payments. If so, an adjustable rate mortgage (ARM) may be the right one for you.
With an ARM, your interest rate is adjusted periodically to keep it in line with changing market rates. Your payments will rise and dip with interest rates.
Naturally, your primary concern with an ARM is in knowing the maximum possible amount you could wind up paying. For this reason, an ARM has 2 “caps,” or limits on exactly how large an increase is permissible. The first cap limits the amount your interest rate can increase during each adjustment period. For example, an ARM that adjusts annually with a 2% cap will never increase more than 2% per year. The second cap limits the total amount of interest adjustments during the life of your loan. For example, an ARM with a 6% lifetime cap will never increase beyond this point, regardless of market fluctuations.
These are the two main types of mortgages. There are numerous other options available. Ask your lender what options are available for you.