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When I think about shopping, I admit, I’m a total girl. I think dressing rooms and credit cards and linking arms with my friends as we skip through the mall. That’s why the word shopping never really fit for me when it came to mortgages. Shopping for a house, yes. For the financing…nope.

The thing is, regardless of my feelings about the wording, mortgage shopping is imperative. It’s vital. I read a statistic recently that said that at the end of a 30 year mortgage, you will end up paying more in interest the actual selling price of your house. If you were to borrow $125,000 at 8% for a 30 year mortgage, you will pay over $205,000 just in interest! Add that to your $125,000 initial loan, and you’ve paid over $330,000!

Now that my smart numbers have shocked you into the reality of mortgage shopping (no arm linking please!), here’s a major reason it’s important: not all mortgages are created equal. Depending on your situation, how much you want to have as a down payment, how long you plan to stay in the house, and other determining factors, one mortgage type could be better than another.

Fixed Rate Mortgage

Fixed rate mortgages are the most traditional home loan type. The term ‘fixed rate’ refers to the interest rate on the mortgage being just that, fixed. No matter if it’s a 30,20,15 or 10 year loan, the monthly payment for both the interest and the principle never changes. For a fixed rate mortgage, the down payment may be as low as 5%. The guarantee of predictable payments may cost a bit more in the beginning, but it might be worth it to you. (Side note: Although interest and principle payments are always the same, escrow expenses like property taxes and insurance could change from year to year.)

Adjustable Rate Mortgage

An adjustable rate mortgage (commonly referred to as an ARM) ordinarily begins at a lower interest rate (and as a result, lower monthly payments) than a fixed rate mortgage. The rate however fluctuates dependant on market interest rates. Generally an ARM is adjusted annually, but some are modified more frequently. Increases are usually capped for any given year and for the life of the loan.

For example, an adjustable rate mortgage could include an annual cap of 2% points and a cap over the life of the loan of 6% points.

Adjustable rate mortgages are advantageous for those who expect their income to increase in years following the first year of the loan. With an ARM, more house can be purchased in the beginning on a lower current income.

Balloon Mortgage

Balloon mortgages work for those who are planning on being in their home for a limited amount of time. This type of mortgage is popular with buyers in more temporary situations who want a lower interest rate but aren’t comfortable with adjustable rate mortgages. Often balloon mortgages have lower interest rates than fixed rate loans, but the full balance of the loan is due in five to seven years. In a case where a buyer with a balloon mortgage is still in the home at the end of the loan term, another mortgage must be found to pay off the first.

Jumbo Loan

A jumbo loan is like biggie sizing with a FDA approved loan. Most lenders follow the Fannie Mae or Freddie Mac guidelines to limit borrowing amounts to $252,700. Those looking to borrow more need a jumbo loan.

Buying a house is likely going to be the biggest financial decision of your life. Shop wisely is an understatement.

One Response to “Shop Wisely My Friends”

Thanks for
the info, I would suppose that shopping for mortgage isn’t the same as
shopping for teak patio furniture or anything.  Hmmm. is a balloon
mortgage the same as an interest only mortgage…that is what we are
looking at.

Something to say?

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