Home finance tips
Home finance tips
When you are ready to buy a house, there are basically three types of mortgages available. Of these three, only one is a good selection.
The first type of loan is the Interest Only Loan is just what it says, you are paying only interest on the loan. You do have the opportunity to pay extra and have it applied to the principal but there are very few people that have the discipline to do that. This is not a good loan to take.
The second type of mortgage is the Adjustable Rate Mortgage (A.R.M.). There are several variations to this loan. One example is the 3/1 A.R.M. All this means is that for the first 3 years the interest rate is locked in, after that the interest rate will adjust annually. You can find A.R.M.'s that are 3/1 or 5/1 easily. These are not very good loans because you are gambling that your interest rate will not go up. Some of these loans do have some "safety" features included such as your interest rate can not go up more than 2% per year and they also cap the maximum that your interest can be. It is still not a very good idea to get a mortgage where your interest rate could increase.
The third type of mortgage is a Fixed Rate Mortgage. This is far and away the best choice. In fact, I would not suggest anything other than a fixed rate mortgage. First off you know that your payment will remain the same throughout the life of the loan (unless you refinance). Second you are guaranteed to pay the loan of in a certain number of years. The most popular Fixed Rate Mortgages are the 30 year and 15 year loans. If you take a 30 year loan, you are guaranteed to have your house paid for in 30 years, less if you pay extra on your payments.
I recommend the 15 year Fixed Rate Mortgage and here is why. First you will be guaranteed to have your house paid for in 15 years or less. Second you will save a tremendous amount of money over the course of the loan. Here is an example of a 15 year fixed compared to a 30 year fixed. According to http://www.dinkytown.net/java/MortgageCompare.html if you take a $100,000 loan at 6% your payment will be $843.86. If you take a 30 year loan your payment will be $599.55.
As you can see, your monthly payment will be lower on a 30 year loan but when you calculate over the life of the loan it looks quite differently. With the 30 year mortgage you will have paid $215,838 on your loan. With the 15 year mortgage you will have paid $151,894. By taking the 15 year mortgage instead of the 30 year mortgage you will have saved over $64,000!
The key to taking out a home mortgage, in my opinion, is to get a fixed rate and pay it off as quickly as possible. The sooner you can pay off your mortgage the less you will have paid.