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How long will I be
living in this house? How much cash do I want to have available
after my closing? If you knew what interest rates where going to do
in the future, your choice of financing products would be much
easier. But you don't. So you need to make a decision based upon
your answers to the above questions Use some common sense! If your
mortgage payment is somewhat of a struggle to start and your working
a lot of overtime to make it, then a short term adjustable rate
mortgage (ARM) is NOT for you! TERM? If you are preparing to
purchase your first home, keeping your monthly payment low is
probably one of your major goals. This probably rules out anything
less than a thirty year mortgage. How old will you be in thirty
years? Make sure that you check the monthly payment of a shorter
term as it may be manageable now. Figure out how much you'll save in
interest. It's pretty shocking. There are only two (2) major
categories of First Mortgages. FIXED RATE and ADJUSTABLE RATE FIXED
RATE MORTGAGE: A FIXED RATE provides you with an interest rate that
will never change. Your monthly payment (principal & interest)
will always be the same no matter what happens to interest rates
after your closing. If the interest rates go higher later, your
payment stays the same. If the interest rates go down after your
closing, your payment stays the same.. With a fixed rate mortgage,
unless you have a pre-payment penalty that specifically precludes
any additional principal payments, any additional principal payments
will NOT REDUCE YOUR MONTHLY PAYMENTS . You will only reduce the
number of payment that will be due overall. You should be aware that
even small additional principal reductions have a significant impact
on your interest savings. ADJUSTABLE RATE MORTGAGES (ARM): Most ARMs
are written for a period of 30 years. If you want a shorter term,
just ask. It might be available. Realize that the interest rate on
ARMs can and in most instances WILL change from time to time. ARMs
function under the same principles. At some pre-determined time (
I.E.: monthly, annually, every three, five, or seven years), a
particular index or point of reference (i.e.: Treasury Bills,
Treasury Security Index, Prime Rate, Cost of Funds Index, etc.) At
the time of adjustment, the index is added to a pre-determined
MARGIN. The total of the two will usually be your new interest rate
until the next adjustment period. This is also known as THE FULLY
INDEXED RATE. Many lenders offer artificially low start interest
rates to attract borrowers. You should have your loan officer show
you what the payment would be if the adjustment formula were
calculated today. You should figure this out and calculate your
monthly payment, as this is where your next payment will likely go,
assuming that the index does not change after your closing. You are
pretty much betting that the rates will be lower at your adjustment.
Unless you have some other specific motivation or are already aware
of a future event, such as retirement or moving to another area, you
should probably be looking at a Fixed Rate Mortgage. ARMs will
generally provide annual and lifetime interest rate caps. The Annual
Interest Rate Cap will limit the amount of change from one
adjustment period to another. Annual caps are usually around 2%.
Lifetime caps are generally around 6%-7% over the start rate. These
caps are provided to help minimize the amount of payment shock at
adjustment time. Make sure that you ask to see a copy of the
specific program disclosure at the time you apply.
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