InterestingRates

Fixed or flexible

• Before you start looking for a lender, you have to figure out what type of loan you are in the market for. There are two basic types: fixed-rate and adjustable-rate mortgages, known as ARMs.

  With a fixed-rate loan, the monthly payment of the interest and principal stays the same for the duration of the loan. With an ARM, on the other hand, the interest rate varies as core lending rates rise or fall, with the amount you pay normally revised after a fixed period, sometimes as little as three months or more usually after a year or two.

  The uncertainty of not knowing what you will pay on an ARM further down the road is offset by the fact that interest rates on adjustable-rate mortgages are usually substantially lower than for fixed-rate mortgages. Bear in mind too that if interest rates fall you can end up paying substantially less, but if they rise you could end up paying a lot more – and no body knows what the situation will be in 15, 20, 25 or 30 years, the typical lengths of mortgage loans.

• ARMs charm in the short-term  

  When deciding which type of loan to apply for it is therefore important to take into account how long you expect to be repaying it. Favor ARMs if you are looking at the short term – say, less than five years – and fixed rate mortgages if you plan to pay off the house for the long haul.

No matter how carefully you plan, there is always a slight risk that unforeseen circumstances could mean you are unable to repay what you borrowed. However, some types of loan are considerably more dangerous than others. Often these types of loan look very attractive in the beginning but in reality will cost you a lot more than more traditional loans.

 

Among such high-risk mortgages to watch out for are:

Jumbo loans A mortgage for an amount that you probably cannot afford but that lenders may offer you based on your current financial situation, even if it means pushing your personal finances to the limit. Interest rates may be higher than traditional loans, but the repayment period longer.

Forty or fifty-year loans Though borrowing over such a long period of time will keep your monthly payments low, you’ll end up paying a lot more in interest over the life of the mortgage. Besides which, do you still want to be repaying your house when you retire or even after retirement?

Option ARM A loan with different payment options may look initially like a fantastic idea. But often borrowers are tempted to make the minimum payment each month, which is often only the interest. The result is that you are not reducing your debt but could actually be increasing it.

Interest-only loan Short of making extra payments – which few people do – paying only the interest each month means that you are taking nothing off the capital. If you stuck with it you would always be in debt.

 

If you've decided on a loan, you need to find a lender. You can find the right mortgage lender here.

Or, alternatively, find out what more you need to know.