Shopping for a Home Mortgage
by Ginita Wall, CPA, CFP
An excerpt from The Way to Save: A 10-Step Blueprint for Financial Security
Many financial sources are available for home mortgages: banks, credit union, insurance companies, and mortgage companies. A mortgage broker can find the best mortgage for you and help you with the paperwork needed to secure the financing. But be aware that the mortgage broker will be paid a fee, either by you or by the institution with which the loan is arranged. If you use a mortgage broker, be sure the terms of your agreement are spelled out in advance, and preferably in writing.
You will be offered a wide array of options to finance your home-fixed rate mortgages versus adjustable-rate mortgages (ARMs), higher points (up-front fees) versus no points but higher rates, and thirty-year mortgages versus fifteen-year mortgages. Let's explore each of these in turn.
Fixed-rate Mortgages versus Adjustable-rate Mortgages
Adjustable-rate mortgages cost considerably less than fixed-rate mortgage in the first one to three years of the loan, but if you plan to own the home for more than four years, you may find that a fixed-rate mortgage is cheaper over the long run. A convertible mortgage offers the best of both worlds. It begins as an adjustable-rate mortgage, but with the payment of a nominal fee it can be converted to a fixed-rate mortgage in the future, at about one-half a percentage point higher than the ten-going rate for new fixed-rate loans.
If interest rates are on the rise, a fixed-rate mortgage is probably your best bet. But if interest rates are steady and likely to remain so or drop during the next few years, a convertible-rate mortgage will allow you to take advantage of the low "teaser" rate the first year and then convert to a fixed-rate mortgage when the adjustable rates approach the fixed rate.
Points are up-front fees that are charged on the loan, and each point is equal to 1 percent of the loan amount. The long-term rate is the interest rate that you will pay over the life of the loan. In essence, you can "buy down" the long-term interest rate by paying points up front.
If you plan to own the house for just a few years, accept a higher interest rate rather than paying more points up front. The reason is obvious: The higher loan rate will be paid for just a few years, so paying points to lower the rate won't be cost effective. But if you plan to own the house for a long time, then paying additional points to reduce the interest rate on the loan makes sense. The cost of point will be insignificant compared to the savings over the life of the loan due to lower interest rates.
A Thirty-Year Mortgage or a Fifteen-Year Mortgage?
If you choose a fifteen-year mortgage, the interest rate will be somewhat less than with a thirty-year mortgage. In addition, the quicker you pay your loan, the less interest you will pay over the life of the loan. But even thought the interest savings of a fifteen-year mortgage over the life of the loan are phenomenal, you may not want to commit yourself to the shorter loan. You may not qualify for the higher payments of the fifteen-year loan, or you may not want to lock yourself into making the larger payments. If so, consider taking a thirty-year loan but making additional principal payments on the loan each month, in whatever amounts you can. Extra payments can make a big difference in the time in which the loan is paid off.
Ginita Wall is the Co-founder of WIFE. She writes two weekly columns: Tax Talk, Suddenly Single. Worth Magazine recently named Ginita Wall, CPA, CFP, one of the top financial advisers in the country. She is the author of several books, including "Your Next Fifty Years" and "Our Money Our Selves". Visit her website at: PlanForWealth.com.
Take the Next Step
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