Tuesday, November 20, 2007

Crazy Sexy Mortgage

You have heard that interest rates have dropped, but is now the right time to get a new mortgage or refinance?

Mortgage rates have stayed relatively low with the recent interest rate drops, but they are still considerably higher than the where they were two years ago. Many fear that the mortgage rates will ultimately go higher, so now the right time to pull the trigger?

Here are some considerations:

1) 15-year versus 30-year debate

“What can I afford on a monthly basis?”
The mortgage payment is only part of what you will pay to live in your home. You still need to think about your monthly expenses. Here are a couple of things to consider: groceries, utilities, insurance, car payments. Furthermore, you should also budget for your house’s general upkeep.
A 30-year mortgage will have a lower monthly payment and a higher interest rate than a 15-year mortgage. You will have a smaller monthly obligation but you'll pay more for your house over time because you're paying it off with interest for a longer period.

On the other hand, a 15-year mortgage will have a higher monthly payment and a lower interest rate so you'll pay less for your house because you're paying it off in a shorter period.

For most first time buyers, taking a 15-year mortgage is not a good idea. The higher monthly payment associated with the 15-year mortgage is usually too high.
However, for home buyers with sufficient income, the 15-year loan might be a good idea.

2) Fixed rate vs. adjustable-rate

This question really depends on how long you plan to be in your house. This something you probably can’t be too certain about, but you probably have a pretty good gut feeling about.

You might be single right now and plan on buying a small place, like a condo. Or your are just starting a family, and you know you will need more space for your growing family.

Whatever the answer to this question is will determine if it make sense for you to get a fixed-rate or adjustable rate mortgage.

A fixed rate mortgage will lock you into a rate for the length of your loan, while an adjustable rate loan with adjust in accordance with the interest rate. The adjustable rate loan could be substantially lower than the fixed rate loan in the short term, but there is always a danger they could raise.

In conclusion, if you know that you will be in your home for a long period of time, the fixed rate mortgage is probably the right decision. However, if you see your self being in the home for only a couple of years, the adjustable rate is a good choice.

3) Work out the dollars

This is a simple exercise of calculating how much interest you will pay over the course of the loan. This is where you most role the dice. On paper the adjustable rate loan will always look more attractive. To make the final decision, you really have to ask your self how much risk you would like to take on.

Right now the interest rates are almost at historic lows. To say the rates will stay this low over time is hard to say…out bet is to with the fixed rate.

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