Picking a home loan short term

You’ve found a home, your credit is in good shape and you have money for a down payment. So, how do you go about picking the right home loan for you? Picking A Home Loan – Short Term There are more than a few issues that go into picking a home loan. One of the key factors is the amount of time you intend to live in the residence. If you expect to sell within a few years, then picking a home loan for a short term scenario is going to be relatively easy. ARMS – Adjustable Rate Mortgages Adjustable rate mortgages are very good solutions for short term home ownership situations. The advantage lies primarily in the fact you will get a much lower interest rate on an adjustable mortgage. This, of course, translates into lower monthly payments, which gives you financial flexibility for the first few years of the loan. Interest rates on ARMS are lower than fixed rate loans for one primary reason. With an ARM, lenders assume you intend to hold on to the home for a relatively short period of time. As a result, they are willing to offer lower interest rates because they don’t have to worry about getting stuck with a bad rate for 15 or 30 years. With a fixed rate mortgage, the lender runs the risk of lending you money at a relatively low rate for a long period of time, only to see rates rise later during the life of the mortgage. This leaves the lender “upside down” on the loan. Lenders make every effort to avoid such scenarios. ARMS – Risk, Risk and Risk The disadvantage associated with ARM loans is the inherent risk. With an ARM, the interest rate can be adjusted on a quarterly or yearly basis depending upon the terms of the loan. If interest rates shoot up and the real estate market cools off, you may be left with a loan you can’t make payments on and a home with nominal equity. This is a nightmare scenario. If you’re considering an ARM, make sure you understand how much the rate can rise, when it can rise and what the resulting payments will be. For short term home ownership situations, adjustable rate mortgages almost always make sense. While an ARM may seem an obvious answer, just be careful you are not stuck holding the bag if rates shoot up.

Fixed rate mortgage loans understanding the basics

Fixed rate mortgages are the most common type of mortgage loan for home buyers. With predictable payments, long term homeowners can plan their budgets and guard against rising interest rates. But a fixed rate mortgage is not for everyone with its higher interest rates and a reduction in your buying power. Fixed Rate Mortgage Features A fixed rate mortgage features set rates, long term low monthly payments, and low risk. Interest rates are determined during your loan application process. Rates are set by the market. You can also lower your interest rate by paying points up front. This option only makes sense if you stay in your home for several years. Long term low monthly payments are another benefit of this type of home loan. Over time, inflation will raise the price of everything except your mortgage payment. As your salary increases, your mortgage costs will also take a smaller percent of your income. The low risk of fixed interest rates also appeals to borrowers. You don’t have to worry about rising interest rates or a balloon payment. You can also repay your loan early, saving money on interest payments. Mortgage Terms Traditionally, fixed rate mortgages were 30 or 15 year terms. Now lenders offer a couple of additional options. 30 year loans are still the most popular with their low monthly payments. A 30 year loan also enables you to qualify for more than shorter loans. 15, 20, and 40 year mortgages are also options. 15 and 20 year loans qualify for lower interest rates, but you will have higher monthly payments between 10% and 15% compared to a 30 year mortgage. Shorter loans also save you interest costs, appealing to those who want their loan paid off before retirement or their children go to college. 40 year mortgages are less common, but offer low monthly payments with higher interest costs. Biweekly mortgage, as the name implies, requires half your mortgage payment every other week. At the end of the year, you have made an extra mortgage payment. You can have your mortgage repaid in 18 to 19 years. Most lenders also allow you to roll over to a 30 year term with no penalties. Fixed Rate Drawbacks Even with their benefits, fixed rate mortgages aren’t for everyone. Alternative mortgages enable you to borrow more than with a fixed rate mortgage. If you move in less than 7 years, you will also probably pay more in interest payments than if you went with an adjustable rate mortgage. Most homeowners move within the fist 7 years of living in a house. You are also locked into an interest rate that could drop in the future.