Tuesday, January 15, 2008

How to Know Which Mortgage Option Is Right For You


It's important to know as much or more about the industry than your lender or bank.


Difficulty: Easy



Step One

Everyone thinks they want a 30 year fixed loan at a great interest rate. This is a one size fits all prescription that may not be right for you. The problem is due to mortgage fraud and a lack of information people are afraid to pursue or consider other options. Most people don't know that the first 6 years payments on a 30 year mortgage pay almost nothing towards the principal. In addition every time you refinance you hit the restart button.

Step Two

Ask yourself these questions to determine which loan option is best for you, and be HONEST with yourself:

1. How long am I going to stay in this house?
2. Am I REALLY going to stay in this loan for the next 30 years?
3. Do I have enough saved for retirement
4. Do I need a band aid loan(3-7 year fixed) just to get me back on my feet?

Step Three

Answering these questions will guide you in the direction you need to go. If you think you are going to move, need money for the kids college, want a down payment for a vacation home or expect a decrease in earnings than you don't want a 30 year fixed. Interest only loans are a great choice if you have answered yes to any of the above questions. With an interest only loan you will not move forward or backwards and still have a lower payment that will allow you to use your money for bills, tuition etc. Most interest only loans also allow you to pay more than the interest only payment without any penalties giving you the best of both worlds. Hybrid option arms or Option arm loans are another option but very dangerous. These loans allow you four options:
1. A minimum payment of anywhere between 1 and 2.5% of the total loan amount
2. An interest only payment
3. A 15 year fixed payment
4. A 30 year fixed payment

A 1 to 2.5% payment on a $500,000 loan amount could be as little as $1600 and as much as $1900. The fully amortized payment would be roughly $2500 on a 30 year fixed at 6%. If you were to make a payment of $1600 a month you would be adding $900 a month to what you owe on the house. For example, you owe $500,000 on a home worth $700,000 and you make the 1% payment for 6 months. At the end of 6 months you would owe 505,400. This 1% payment essentially reduces the equity in you've built up in your property. I only recommend this type of loan for people looking for a reverse mortgage or that experience some kind of personal travesty.

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