April 30, 2019

Know About Mortgages Before You Go

When you plan a road trip, there are big decisions to make -- where to go, what to pack, when to leave. Then there are small ones like where to eat or fill up.

It's similar with mortgages. You'll be asked to make a few major, and some smaller, decisions. Knowing what you want, so you're ready to indicate the right turns, will help you enjoy the ride.

Here are some areas you'll want to explore before deciding which mortgage product is best for you.

Fixed- or Adjustable-Rate Mortgage

The fixed-rate mortgage is preferred by 90% of buyers. Its main selling point is a set interest rate, offering payment stability over the life of the loan, normally 10, 15, 20, or 30 years.

Of course, if your monthly mortgage includes escrow for taxes and insurance, your payments could fluctuate if your property tax and homeowners insurance rates change, but your interest rate will stay the same. And should rates drop significantly, you could refinance to a lower rate.

Adjustable-rate mortgages (ARMs) work very differently. Their interest rate starts out fixed, but then can fluctuate up or down over the life of the loan. For instance, a 5/1 ARM loan would have a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. Thus the “5” “1” naming scheme.

Although the rate with an ARM can rise, ARM rates typically start off lower than those available for fixed-rate mortgages.

What's the bottom line?

If you plan to stay in your home for 10 years or longer, consider a fixed-rate. If you plan to sell earlier, say within five years, an ARM may make more sense for you. A lender can run the numbers for you based on your personal situation.

Paying Points

If your road trip destination is a beachfront resort, you'll likely want to fill up and buy groceries just outside town where it's cheaper. Similar thinking by paying discount points on your loan can save you money down the road.

Points are fees paid directly to the lender at the close of your loan. One point costs 1% of your mortgage amount (or $1,000 for every $100,000). Essentially, this allows you to pay some interest upfront in exchange for a lower interest rate, and the cost may be tax-deductible.

As a general rule of thumb, consider paying points if you plan to own the home for more than 10 years.

It's a Great Time to Hit the Road!

To determine the best type of mortgage that's right for you, lean on your lender or financial professional for guidance. A mortgage is a long–term commitment, and the more knowledgeable and prepared you are, the more successful you'll be.

Spring has always been a great time to buy a home, and this year is no exception. Continue following our spring homebuying blog series to learn more about the homebuying journey!