HOW TO CHOOSE THE RIGHT MORTGAGE


Choosing the right type of mortgage can, many times, be simple. At other times, especially if you are considering an Adjustable Rate Mortgage, ARM, the choice may be less clear. Doing some homework to evaluate your personal financial situation and considering the features of available loan programs and how they correspond to your needs, will be time well spent.

Start by asking yourself these questions:
Budget What is my current financial situation: income, debt, other expenses? How will that change with a new house?

Income What do I think my future income will be? Are there any plans to change my income stream? Will I be able to absorb future mortgage payment increases?

Assets What type of assets and how much is available for a down payment and closing costs? What will be my other purchase needs when I buy a house and where will those monies come from?

Housing Needs How long do I plan on staying in this house? How fast do I want to build equity? What are my long-term equity needs, e.g., retirement funds, college tuition, etc.

Economic Outlook What do I feel will be the direction of future interest rate movements? How confident am I in that view?

Tax Situation Would I benefit from making a “prepaid interest” payment in the form of discount points? What will be the impact of this purchase on my tax situation?

Risk What is my risk tolerance for payment changes? Will I have enough cushion to absorb a 15% to 20% payment increase?

The answers to these questions should assist you in determining which type of loan program you need. A loan program that has a fixed interest rate and fixed payment for the term of the loan is the most conservative. With an Adjustable Rate Mortgage, ARM, you have the risk of payment increases, however, you may have a lower initial payment and be able to take advantage of reduced payment if the interest rates fall. Most ARMs have caps that restrict the amount your rate can increase or decrease at the scheduled Change Dates, as well as caps that restrict the overall maximum rate. To fully evaluate an ARM, you must understand the terminology used in describing its features. A “Glossary of Real Estate Financing Jargon” is enclosed.

Key features with an ARM program which should be analyzed include: the type of index, life and payment change caps, margin, fully indexed rate, negative amortization, start rate, discount points, conversion to fixed rate options and payment change frequency.

In addition to ARMs, there are many loan programs available. For example, a fixed rate mortgage may have payments that are fixed for a specified period of time and there are mortgages with combined features. Because of the many options available, your best resource is your PHH Home Loans loan officer.