Mortgage Type Tips
When it comes to looking at mortgage types, ask yourself one giant question: What is your goal? Will you be in this new home when the grandkids come to play, or is this a starter home that you'll trade up in the next five years? The answer to that question will help narrow your mortgage choices.
Staying in the house a lifetime? A fixed rate loan means you have the security of knowing what your payments will be. Moving on? An ARM has lower interest rates and you might sell before they rise. Or you could look at a hybrid ARM that is fixed for, say, five years, then adjusts annually.
You look at rates and points differently depending on the amount of time you will stay in the house. If a lender charges points, and required third parties charge for their services, it increases the cost of the loan. If you sell your home in a few years and have paid points to get a better interest rate, you may not recoup the cost of those fees. And your equity in the house will be minimal, but you are betting the home will appreciate enough to cover the fees, or that the money you save in interest will balance out the additional cost of the loan. In other words, if you rely on moving in a short time, you will be subject to where the market is when that time comes.
If you are choosing an ARM, ask your lender to provide examples of monthly payments before and after any rate adjustment, in the event interest rates increase or decrease. It's a reality check.