The Most Basic Mortgage Question Answered: Which Home Loan is Best for You?
Q: What’s the best kind of mortgage for me to get?
A: The kind you can afford.
Okay, perhaps you were looking for a less terse answer, so we’ll explain in more detail. First, you want to look at the length of the loan. Mortgage loans have different lifetimes: you can get a mortgage that you’ll repay in as few as 15 years, or as many as 40.
Thirty years is the most traditional length. Because you’re paying interest for the privilege of having this loan, you generally want to pay it off as quickly as possiblel so go for the shortest mortgage that you can handle.
Second, you want to look at what’s contained in your payments. It’s usually PITI: Principal, Interest, Taxes and Insurance. The principal is the amount of money that you’ve borrowed, which you repay bit by bit: If you borrow $100,000 with a 30-year-fixed loan at today’s rates, your first monthly payment will be over $600, but less than $100 of that will be repayment of principal.
If you’re buying a house, your property taxes are often paid through your mortgage bank. This means you’re only writing one check, which is easy, but if you’re a real stickler for having the use of your own money, wrestle with the bank and pay your property taxes directly to the city. Ditto your homeowner’s insurance.
What you want to beware of, here, is talking to a mortgage lender, and getting a quote for a mortgage that you think you can afford because it contains only principal and insurance, and then suddenly realizing - oops! -that if you’re a homeowner, you’ll have to pay property taxes too.
This is less of a problem for apartment shoppers because co-op owners have their property taxes rolled into their maintenance, and condo owners usually see the number broken out separately as RET (real estate taxes) when they buy.
Third, you want to look at what your “payment schedule” is. Typically a borrower pays once a month - if that check is always the same, the mortgage is “fixed.” Interest rates are typically higher on fixed-rate home loans, but they guarantee peace of mind: you know what your housing costs will be for years and years. They won’t go up the way rent does, and if you play it right, your career will advance and your income will grow - but your housing costs won’t.
Mortgages can also have regularly scheduled payments that reset, or change, every couple of years.
Some borrowers like them because they can offer low “teaser” rates to start - but currently, ARMs aren’t offering terrific mortgage rates. If you want one, make sure your lender carefully explains to you what happens when your mortgage resets; you’ll need to know how much you might end up on the hook for.
Finally, there are some loans where you pay only the interest regularly, and then pay back the principal on a more discretionary basis. This is the loan for you if you’re a Wall Streeter and see a lump of money once a year. Otherwise, stay away - it’s too easy to think, “I’ll pay it next month!” when considering an interest-only mortgage.
Now that you know some of the basics of what goes in a mortgage, you can start shopping around. If you want to go direct to a financial institution, try the one where you already have a checking account, and be sure to point out to them you’re a valued customer.
If you wish to use a mortgage broker to help you get a loan, we can help. Complete the free online application above.
SOURCE: The New York Blade