| "body"> | | | | your answers. These are the most important |
| You clicked on this page to find out one thing - | | | | questions you need to answer before shopping for a |
| whether you should choose a fixed rate mortgage or | | | | house. Did you catch that? Not before you look for a |
| an adjustable rate mortgage (ARM). Instead of giving | | | | lender. Not before you hear what your monthly |
| you complicated definitions, let's discuss the top two | | | | payment will be. Before you shop. Otherwise, you may |
| questions you need to answer before making your | | | | want a house so badly that you'll be willing to do |
| choice. | | | | anything to get it. These answers will not only help you |
| The biggest mistake most people make is to wait until | | | | decide on a loan, but they'll also help you choose a |
| after they find a home to decide whether they can | | | | home. |
| afford it. By that point, they're committed to a house | | | | Time in the Home |
| and will do almost anything to get it. So, instead of | | | | How long do you expect to stay in the home? Five, |
| letting you make that mistake, I want you to answer a | | | | ten, twenty years? If you plan to stay in the home |
| few questions first. | | | | more than ten years and interest rates are low, you |
| The Important Questions | | | | want to choose a fixed rate loan. The payment will be |
| How long do you expect to stay in the home? I know, | | | | lower, and you can budget for the next thirty years, |
| it's a hard question, and I don't expect you to be a | | | | though it's really more practical to choose a 15 year |
| fortune teller. But, think about it realistically. If you're | | | | loan and save yourself thousands in interest. |
| moving for the school district, how long will your kids be | | | | If you answered ten or fewer years, you may want to |
| in school? How long do you think you'll stay at the | | | | choose an ARM. Generally, ARMs are available up to |
| same job? | | | | 10/1, which means that you pay the fixed rate for 10 |
| How much can you afford to pay monthly for your | | | | years and then it becomes adjustable. The good news |
| home? Don't give the ideal answer that's $200 more | | | | is that if you move before those ten years are up, |
| than you can currently pay per month. Be completely | | | | then you will have saved money. If you discover you'll |
| honest with yourself. If that means you need to go in | | | | be in the house longer, refinance when interest rates |
| reverse and make a monthly budget, do it. Just make | | | | are low so that you can get a fixed rate loan. Also, if |
| sure your budget includes some money that goes into | | | | you can find a reasonable 10/1 and rates are high, you |
| savings every month so that when there's an | | | | should probably take it since rates will probably fall |
| emergency, you'll be ready for it. | | | | within the next 10 years. |
| The Basics | | | | Monthly Payment |
| Fixed rate mortgages - the name says it all. You get a | | | | This is the single most important issue when |
| fixed rate that stays the same for the life of the loan, | | | | purchasing a home. If you can't afford the monthly |
| usually 15 or 30 years. Although your interest rate will | | | | payment now, then don't assume you'll be able to |
| be a little higher than with an ARM, you will know | | | | afford it later. Before shopping, decide how much you |
| exactly how much you'll pay per month for a few | | | | can pay and commit to sticking with that number no |
| decades. If you love stability, this loan is probably for | | | | matter what. |
| you. Also when interest rates are low, this is the loan | | | | If interest rates are low, lock into the savings with a |
| that lets you cash in for years to come. | | | | fixed rate loan. If rates are extremely high, try to get a |
| ARMs, on the other hand, are anything but stable. | | | | 5/1 or preferably a 10/1 ARM. When rates drop in that |
| These loans generally have a lower initial interest rate | | | | five to ten year span, refinance at a fixed rate. |
| than fixed rate loans (usually around 2% less). This | | | | ARMs have a cap on the rate, so before purchasing a |
| initial teaser rate usually lasts anywhere from 1 to 10 | | | | home, calculate the highest possible monthly payment |
| years. You'll know it's an ARM when you see 3/1, 5/1, | | | | based on the cap and decide whether you could |
| 10/1; respectively, these are 3, 5, and 10 year fixed | | | | make the payment if rates went up. If not, you'll need |
| rates. After the set time, the rate varies based on a | | | | to hope for low rates so that you can refinance or |
| standard, usually the Treasury Bond rate. The rate can | | | | simply choose a fixed rate loan. |
| change monthly or yearly, but yearly changes usually | | | | The Bottom Line |
| work out best for the consumer. | | | | The bottom line is to get the best deal you can right |
| Although we're not going to talk about them here, | | | | now and for the next ten years. Interest rates make a |
| there are several types of hybrid loans that can give | | | | full swing about every decade. If you can save money |
| you the best of both worlds. To find out more about | | | | with a 10/1 and you are pretty sure rates will drop |
| those, check out this article from The Motley Fool, | | | | during the first ten years, go ahead, choose the ARM, |
| "Your Choice of Mortgage: Basics and Variations." | | | | and refinance when rates are low. Remember to stay |
| Let's Look at Your Answers | | | | within your budget no matter what, and be prepared to |
| Now that we're through with the basics, let's talk about | | | | refinance someday if you really want the best deal. |