Buyer Guide · Waltham, MA
Fortunately for buyers, there are a variety of mortgages to choose from. It is in your best interest to investigate each of them to determine which is the best for your situation. You probably won't qualify for all of them. In fact, you may only qualify for one. But if you do qualify for more than one, you may save yourself money (and worry) in the long run if you do your homework before signing on the dotted line.
Dave DiGregorioColdwell Banker RealtyWaltham, MA
Stability
Consider a fixed rate mortgage if either of the following describes you:
You plan on living in your new home for many years, and/or
You are not a risk-taker and prefer the stability of knowing how much your payment will be each month.
The upside
Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan.
Making extra payments to principal will allow you to pay your loan off sooner.
The trade-off
This may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you'll be stuck with that high interest for the life of the loan (unless you choose to refinance).
Conversely, if interest rates are very low, you'll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.
Fixed-rate terms
The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:
Fastest payoff
Middle ground
Most common
Flexibility
If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate.
Initial rate
Generally, the interest rate when you take out your loan will be lower than a fixed-rate mortgage.
Please note that this is true initially, not necessarily long-term.
Payments
Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income is not sufficient to cover the highest possible payments, then this option is not for you.
On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up.
Index & margin
Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate]) and your payment will be based on the index your lender uses plus a margin, generally of two to three points.
Get the formula used by your lender in writing and make sure you understand what it means.
Caps
Fortunately, the amount an ARM can increase is limited. There are "caps" on how much your lender can increase your rate, both for a period of one year and for the life of the loan.
Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you'll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.
Hybrid
If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you.
How it works
This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years.
Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.
FHA and VA
Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.
For veterans
Veterans may qualify for a loan from the U.S. Department of Veterans Affairs.
There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
For lower-income buyers
The Federal Housing Administration offers loans to lower-income Americans.
Look for the phrase "FHA approved" when looking at ads for homes.
Buyer articles
Waltham, MA
Contact Dave DiGregorio of Coldwell Banker Realty if you have questions and would like to discuss further.
