Let me begin by stating the fact that you tought to enlist the help of your local mortgage professionals in finding loan options. You need to find the loan that will best suit your needs. It’s a common practice for individuals to just assume that fixed rate mortgages are the best, but the truth is, there are a lot more options that could help save hundreds or thousands of dollars. So I’m going to focus on 3 of the most common ones, which are the Fixed Rate, Interest-Only, and Adjustable Rate (ARM) mortgages.
I’ll start with the Fixed and/or Adjustable rate mortgages. We’ll assume that your loan will be based on a term of 30 years. Both of these loan types fully amortize over 30 years, meaning that your monthly payment will include the principle and the interest for your loan. The main difference in these two loan types is the obvious one, and that means one is ‘fixed’ and one is ‘adjustable’. But the beginning interest rate, called the ‘start rate’, is lower on the ARM than on the Fixed rate loans.
The main question you have to ask about these two options would be ‘how long’ are you planning on staying in your home? It’s surprising how many clients fail to ask this, but they need to consider many variables like employment, if you plan on moving out of state, maybe getting re-assigned somewhere else, if your family size will increase, or if you look at this as a starter home, etc.
Being a mortgage broker myself, I would never recommend getting an ARM with a term of less than two year, or one that’s more than five years. These terms represent only the portion of time that the interest rate and the payment on your ARM will actually be fixed and won’t change. Let’s look at a purchase of $250K and compare interest rates and payments for a three-year ARM against a fixed rate. Taking the current pricing for a three-year ARM, it comes to 3.125%, and for the fixed rate it comes to 5.125%. So by comparison, the payments for the ARM are $1,071 and the fixed rate payments come to $1,361. When you multiply the difference over 36 months, your savings with the ARM come to $10,440 over your first three years. To put it simply, by not totally comprehending how much time you plan on staying in the home, can wind up costing you thousands.
Now for the Interest-Only loans. These aren’t all that different from the ARMs, in the fact that you have a period of time that your interest only period will be fixed, most usually based on three, five, seven, or ten years. The only thing is, the interest you pay on the Interest-Only loan is exactly that, the interest. Most usually this loan type is harder to qualify for because it involves a multi-faceted thought process from the client. These are great loan types for big purchases, or for clients with income that goes up and down, because you can pay just the interest when you need to, with anything more than just the interest getting paid as a result in the reduction of your principle. To get a better grasp on what all this means, if you still aren’t clear on it, I suggest you consult with a trusted mortgage professional.