What loan is right for you? Figuring out your current needs as well as future goals will help you make that decision
What loan is right for you? Figuring out your current needs as well as future goals will help you make that decision. A few questions to ask yourself before heading into the process: What�s your current financial situation? Do you expect it to change or to remain constant? Do you plan to keep your job? Is your employment stable, or do you imagine you�ll have to look for new work sometime soon?
There are other factors to keep in mind. Are you committed to your geographical area, or do you envision selling your home and moving in the future? How about your family structure? If you plan on adding to your household -- having children, or another family member moving in -- you should have that in mind before seeking out a loan.
Finally, would you prefer a mortgage payment that remains consistent or that may fluctuate with time? The answers to these questions will drive the rest of your loan-seeking process.
The State of Rates
With apologies to Bob Dylan: The rates they are a-changing. Federal Reserve chairman Alan Greenspan cut rates 13 times between January 2001 and May 2003, driving its benchmarks federal funds rate to a nearly half-century low of 1 percent. But with rising economic tides spurring fears of inflation, Greenspan is taking a more aggressive stance by raising rates for the first time since March 2000.
What does this mean for borrowers? The upshot is that they�ll be feeling the pinch, particularly when opting for variable-rate mortgages. Though short-term rates are projected to stay relatively low even with the hikes -- analysts say the Fed funds rate should hit 2.25 by Christmas 2004 -- rising rates are something to remember as you ponder your options.
Fixed-Rate or Adjustable?
Fixed-rate loans are the most common loan program. You can opt for terms of 30 years, 20 years, 15 years, or 10 years. The most common are 30- and 15-year loans. Fixed-rate loans break down into two types: long-term and short-term. Long-term fixed-rate loans have unchanging interest rates. Therefore, when you lock in an interest rate, it�s yours for the life of the loan. Your payments and interest will be consistent, but over time you�ll be paying a higher rate and more interest. Long-term fixed mortgages generally also require higher down payments. Ultimately, you�re paying for predictability.
Short-term fixed mortgages also translate to consistent payments and interest, but you�ll be getting a lower interest rate and less total interest paid. These loans also offer a more rapid payoff timetable. However, they also require a higher monthly payment, and it�s tougher to qualify.
Fixed mortgages may best suit borrowers who want to lock in a low current rate, make lower monthly payments, or are looking to stay in their home long-term. Those interested in Veterans Administration (VA) loans or with little or no down payment should also consider fixed-rate programs.
Adjustable-rate mortgages (ARMs) have rates that closely follow federal funds percentages. These types of loans vary, so it�s best to ask individual lenders what they offer. In general, however, borrowers who plan to stay in their home short-term (five years or less), believe that interest rates will decrease, and are comfortable with a varying mortgage payment should keep their minds on ARMs.
Choices of ARMs include 6-month certificate of deposit (CDs), 1-year treasury spot, 6-month treasury average, and 12-month treasury average. The 6-month CD is considered most volatile, while the 12-month treasury is most stable.
Specific Loan Programs
If you�re looking for a program that doesn�t require a large down payment, a Federal Housing Administration mortgage might be for you. These FDA-insured loans require an annual fee and hefty initial mortgage-insurance premium upon closing. However, these costs can also be incorporated as part of the loan. Loan caps vary depending on the borrower�s county of residence. FDA also offers specific loans for incorporating energy-efficient improvements into the purchase of a new home, as well as reverse mortgages which enable borrowers 62 and older to borrow against the equity in their home either as a loan or a line of credit.
Conventional loans may be another avenue. These loans are backed by government-sponsored entities, the most well-known of which are Fannie Mae and Freddie Mac. Borrowers can top conventional-loan sources to purchase or refinance homes with first or second mortgages. Currently Fannie Mae and Freddie Mac offer loans up to $333,700 for first mortgages on single-family homes. Private investors also offer conventional loans for higher amounts, but these so-called jumbo loans carry higher interest rates since they�re not federally sponsored.
Bad Credit Loans
Borrowers with less-than-perfect credit may not qualify for standard loans. People who fall into this category may consider the subprime market -- but use caution and do their homework as there are predatory lenders waiting to pounce. To counterbalance the higher risks presented by borrowers with bruised credit, the subprime market typically offers loans that require higher down payments and steeper rates.
This relatively new market has emerged within the last 15 years to serve buyers who otherwise wouldn�t be able to finance their home purchases. Experts caution that subprime loans should be used as short-term (two to four years) solutions only. During that time, it�s best to work toward bettering your credit so that you can refinance into a loan with more optimal terms.
Getting the Best Terms
Getting a lock on the best loan program for you also depends on what you bring to the table. The best-qualified buyers have good credit and payment history, a sizable down payment, and/or a low debt-to-income ratio. The ability to pay all or most closing costs will also lower your interest rate.
Remember, you can always refinance if your situation or needs change. Still, doing your homework beforehand will save you the hassles of having to backtrack. Check your financial picture, assess your needs, talk to lenders, collect references, and make sure you�re committing to what you want before signing on the dotted line.
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