One of the most important things you can do when buying a home is to compare mortgage loans. Mortgage loans determine the amount of your monthly payments as well as the amount you put down, and how much interest you will incur over the life of the loan. To make things simpler, we suggest you ask each lender the following questions:
• What is the loan’s interest rate?
• Will I be charged points?
• What are the closing costs and all other fees?
• What is the annual percentage rate, or APR – the rate you will pay per year for all the costs associated with the loan?
• Is there a pre-payment penalty?
• How is the loan amortized, meaning how quickly is the principal paid off?
No matter what type of loan you are considering you need to find out the answers to these questions. Each of these questions could affect the overall cost of your loan. When you are considering an adjustable rate mortgage, or ARM, you can compare loans by asking the following questions:
• When does the rate adjust?
• How often does the rate adjust?
• Is there a cap limiting the amount by which the rate can adjust?
• What would my monthly payments be if my interest rate hit that cap?
• What is the index and margin that will determine my rate?
• How has the index changed over time?
Using ARM’s are usually riskier due to the uncertainty of interest rates. If you use ARM’s, you are gambling on whether interest rates will go up or down before you adjust your rate. If you understand this, the best and worst case scenarios will help you make an educated decision when comparing loans. You also need to consider how the introductory rate compares with the rates for 30-year fixed rate loans. If there is not much difference, then the fixed loan might be the safer choice. By choosing the fixed loan, you could save a lot in the long term. You also reduce the risk of having interest rates shoot up before you can refinance.
Finally, to truly compare loans, you have to ask yourself some questions:
• How long do I expect to stay in my home?
• Are my job and income secure over the long term?
• Will I be able to afford higher payments in the future?
• How comfortable am I with risk? In the end, the best loan is the one that works for your needs.