Mortgages

[Nathaniel O LeSpade]

Making Sense of Mortgage Options

Start by simply understanding your options. People with average credit ratings or better should be able to secure a fixed mortgage for a traditional 30 year term. This essentially means you pay the same mortgage payment monthly for the entire loan period. Alternatively, you also have the option of choosing a 1, 5, or 10 year Adjustable Rate Mortgage (ARM). These mortgages adjust to the market rate after 1, 5, or 10 years. This could be up or down, depending on how interest rates move. Essentially, this means you could either be paying more or less when your rate lock period ends. Rates traditionally don’t move significantly, so don’t expect any major surprises. However, over the course of a 30 year loan rates could change significantly.

People without credit or with troubled credit should expect higher rates on these standard products. Additionally, you may have to reach into the subprime lending market. These loans typically have much higher interest rates and a variety of different structure. Importantly, when evaluating these loans, ensure there is no penalty for prepayment. Your major goal should be to pay off these loans as soon as possible or refinance to a lower interest rate when your credit improves. EVOLVE BANK & TRUST DOES NOT PARTICIPATE IN THE LENDING OF SUBPRIME MORTGAGE LOANS.

Many other products exist. Options such as reverse amortization and interest only offer a variety of payment terms, while increasing the cost (and sometimes the risk) to the buyer. Unless you have alternative investments, traditional mortgages provide the best option for purchasing a home. Regardless of the mortgage you choose, understand the payment schedule, fees, penalties, and ways the interest rate can be adjusted. Always remember that it is in everyone’s best interest for you to pay off your loan on time.

The Down Payment and the Interest Rate

The two most important parts of the mortgage are the down payment and the interest rate. There are two schools of thought when it comes to paying down a mortgage. Some people suggest paying down your mortgage as soon as possible, while others suggest making minimum payments to maximize your tax advantage. Bottom line, if you are an active investor (401k, real estate, stocks, etc.) it is probably best to pay as little down as possible. If you have good credit, try getting a 100% mortgage. While you will have to pay a higher interest rate, the cost of borrowing for your personal home will be cheaper than the returns you can get from investing.

In contrast, if you are not an active investor, your mortgage can make a reasonable investment vehicle. When most savings accounts offer 2.5% to 4% interest, it makes more sense to pay off your mortgage that charges 6.5% to 7.5%. You are essentially saving about 1.5% on every dollar you repay. The only short coming of this investment strategy is the lack of compounding you would receive with a traditional investment. If you are still young (18-55), consider a tax deferred IRA. You get similar tax benefits, plus a return that can be compounded, basically leaving you more money in the long run.

Understand that everything in this process is negotiable. Your goal should be to minimize the down payment and the interest rate. Typically, the higher the down payment the lower the interest rate and vice versa. Shop around using a mortgage broker to save yourself some time and legwork.

Finally, decide on the right mortgage for you. You should be able to comfortably make the payments and have enough in savings to cover at least three months of payments. This provides a buffer in case of layoff or any other possible tragedy that might occur during the homeownership. Additionally, make sure you get to know your loan officer. A good relationship with your banker could save your house. Banks can be far more flexible than most people think. Again, banks do not want to foreclose on houses because it cost them far more money than they make. While a mortgage is simply a tool to purchase a house, managing this tool properly can save you thousands.