Congratulations! You’ve found the perfect home. It’s in the right neighborhood, it’s the right size, it’s time to sign on the dotted line.
So what’s the best way to finance your home? Here are some things to consider as you think about the best way to finance your new home.
What’s right for you? A fixed rate loan or an adjustable rate loan?
This is a good starting place when you’re thinking about a mortgage. Each loan has its advantages.
A fixed rate loan has an interest rate that is inflexible and does not change over the term of the loan. There is little risk in these loans, as you don’t have to worry about absorbing a higher interest payment during the term of your mortgage.
An adjustable rate loan carries more risk, as the terms fluctuate according to rising interest rates. Traditionally, lenders will reward borrowers that sign onto adjustable rate loans because of this increased risk of increased rates.
If you do not plan on keeping the loan for the full term of the mortgage, then an adjustable rate loan may be for you. Some lenders have created hybrid mortgages, like a 5 Year Fixed (30 year) loan that starts out as a fixed rate loan and converts to an adjustable rate loan after 5 years.
When does paying points on my loan make sense?
If you pay points on your loan, then you are making a one-time payment to reduce the interest rate. Points are the equivalent of a percentage point of your loan amount. So if you’re borrowing $300,000, then one point would be $3,000 added to your closing cost. So if you pay one point on your loan, you generally reduce the interest rate by .25%.
Another option that a borrower might consider is receiving a credit from your lender. If you receive a credit then you are exchanging that credit for a higher interest rate. Credits are also percentage-based, where a one percent credit raises your interest rate by .25%. The credit is then applied to lower your closing cost.
If you choose to pay points or receive a credit, the amount is applied to your closing costs at the time the loan funds.
What are the advantages of an interest-only loan?
There are some advantages you might consider with an interest-only loan. These loans give you the ability to maximize your home purchasing power as well as the flexibility to control cash flow. This means you save a substantial amount of money that you can use to invest, save or use for any other expenditure that might come up during the first ten years of the loan.
Another advantage of interest-only loans–they can be help you maximize tax deductibility giving you more cash to pay down consumer debt.
It’s important that borrowers understand the difference between interest-only loans and negative amortization loans. With interest-only loans, you’re your minimum payment covers the interest and you decide how much of the principal you want to pay down. Your principal balance never increases.
Should you choose a loan with negative amortization?
These are very risky loans, and we discourage borrowers from taking negative amortization loans. With adjustable rate mortgages (ARM), the payments fluctuate with the interest rate. But with negative amortization ARMs you make fixed payments even if the interest rate increases. So you may be left with a total loan balance that increases over the term of your loan.
At what point is it possible to lock in my interest rate?
Your eligibility to lock in your interest rate is determined by your loan consultant. The consultant will look at your application and credit information to assess your eligibility. In order to lock your rate, you must specify a property address.
Interest rate vs APR
The interest rate is the cost to the borrower to actually borrow the lender’s money. APR is the total cost of the mortgage for the duration of the loan–which includes closing costs and lender points.