BUYING A HOME?
If you intend to buy a home, you can pay cash or finance the purchase.
Obviously, few of us are able or willing to pay cash. So, most Americans use mortgages to purchase a home.
FIXED OR ADJUSTABLE?
There is a dizzying array of mortgage options, but it boils down to two primary concepts – fixed rate and adjustable. Fixed rate mortgages have interest rates that do not change.
Things get a bit more complex with an adjustable rate mortgage (ARM). Adjustable rate mortgages have interest rates that are linked to an index. If that index rises, your payment amount rises. If that index falls, your payment amount falls.
Consumers have choices within the ARM concept. The first choice you should make is to determine if an ARM is smart for you. If you’re going to own the home for under 5 years, an ARM is an option worth exploring. Once you determine that an ARM is right, there are more options you should discuss with your qualified lending professional:
Index + Margin:
As described above, the index is the primary driver of your monthly payment within an ARM. But, there’s more. Lenders add a margin to the index to determine your interest rate. Many lenders base the margin you pay on your credit. Example – if the index is 2% and your margin is 2%, your actual interest rate is 4%. Simple, right?
Type of ARM:
There are three primary types of ARMs. A hybrid ARM has aspects of both fixed and adjustable rate mortgages. The rate is fixed for a set term, then it becomes adjustable. You have probably heard of a 5/1 ARM. That means that the rate is fixed for 5 years, then becomes adjustable.
Two other ARM possibilities :
Iinterest only and payment-option terms. In an interest only ARM, you pay only the interest for a specified time, usually 10 years or less. Then, you have to start paying interest and principal. The net result are small payments initially, then larger payments. Finally, there are payment-option ARMs available. These are very flexible instruments that give you several choices on how you want to pay your mortgage each month. Those choices typically include making interest only payments, principal and interest, or a minimum payment that is less than the amount of interest due.