Monday, August 13, 2012

What Are Your Mortgage Options?

It's no wonder that many home buyers are gun shy these days. The thought of signing on the dotted line for a home loan can bring the words "subprime" and "foreclosure" into the conscious swirl.  However, if there is a positive side to everything, then the thing we have all learned from the 2008 real estate debacle is that the best buyers are educated buyers

What Are My Mortgage Options?

There are basically two different types of mortgages: Fixed-rate and Adjustable Rate.  While there are exceptions to the rule, in an economy like ours - where interest rates are still low - fixed rate mortgages are usually the best option for anyone applying for a home loan. 

Fixed-Rate Mortgage

A fixed-rate mortgage is just that - fixed.  Whether you have a 15-, 20-, or 30-year loan, your interest rate will never change.  This was a risky enterprise back in the 1980s when interest rates were well into the double digits.  Fortunately, most people who purchased a home back then refinanced along the way when interest rates came back down.

Currently, a fixed-interest rate for a 30-year loan, assuming you have good credit, is sitting around 3.75%. That's pretty low.  If you are currently in the market, you'll probably want to opt for a fixed-rate mortgage.  However, if the Feds were to adjust the rate next year to 2.75%, you would lose out on a 1% savings, which would cost thousands of dollars over the course of a 30-year loan.

Things to keep in mind: The shorter the mortgage term, the lower the interest rate. On average, a 15-year mortgage will have an interest rate that is about 1.25-1.5% lower than its 30-year counterpart.  However, the monthly payment will be higher, since the loan amount is divided by a shorter term.  Depending on your income and job stability, a 15-year mortgage can be a great way to pay your house off faster, and save thousands.  For those who want a smaller monthly payment, a 30-year mortgage is the way to go.

Adjustable Rate Mortgage (ARM)

These were the villains of the recent real estate crisis. People with poor credit, or no credit, signed up for amazingly affordable Adjustable Rate Mortgages - and then, when the rate adjusted, they were stuck with mortgage payments they couldn't afford.  Unfortunately, many of these buyers were hoping to refinance their homes into lower fixed-interest rates along the way.  Declining home values made that option impossible.

The above scenario describes the problem with an ARM.  They can help people with a low credit score buy a home, but the buyer has to realize that depending on the term of the loan, the rate will adjust in 3 or 5 years, and if the interest rates are higher, the buyer is stuck with an increased mortgage payment.

When are ARM's good?

An ARM can be good if you only plan on owning a home for a few years and then plan to sell.  You can get a lower-than-normal rate for 3 years and, if the real estate market is still in your favor, you can sell your home and break even, or make some extra cash.  It's still a gamble.

Obtaining a mortgage can be a confusing process, and goodness knows its the rare individual who takes the time to read - and understand - every word in the loan documents. But it is important to have a very clear understanding of your mortgage options and what they mean to you in the long term.  

Are You Ready?

If you are thinking about purchasing a home, you need to make sure you feel comfortable with every step of the financing process before signing any documentation. Pacific Place of Redwood City has gathered a short list of trusted financial and mortgage advisers you can speak with to decide the best way to move forward. See more info at

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