Choosing a Mortgage
 

Choosing a Mortgage
The Henssler Financial Group Position Paper

The Hensler Financial Group Wealth Management

There are many types of mortgages from which to choose. Generally, buying a home is the largest purchase an individual will ever make, so making sure he or she chooses the right mortgage is important.

Fixed-Rate Mortgage

A fixed-rate mortgage has a fixed interest rate. Payments never change over the life of the loan. This type of loan is best for homebuyers who have no plans to move in the next five years and who prefer a fixed payment. The most popular fixed-rate mortgage is the 30-year. They are appealing because they offer the lowest fixed payments. Homeowners preferring to pay off their homes faster may want to choose a 15-year, fixed-rate mortgage. However, payments will be higher on a 15-year mortgage.

Adjustable-Rate Mortgage

An adjustable-rate mortgage is a loan with a fluctuating interest rate. Typically, the initial interest rate offered is lower than fixed market rates. The loan will specify whether the interest rate changes annually or every three or five years. This means that each time the interest rate changes, a new monthly payment will be calculated. This loan is not for the faint of heart. One must be able to take on higher payments if rates increase.

Another variation of the adjustable-rate mortgage is one that offers an initial, fixed interest rate for three, five, or seven years and fluctuates thereafter on an annual basis. These may make sense for someone who plans to live in his or her home for only a few years. The homeowner can take advantage of the low fixed-rate and sell his or her home before the interest rate starts to fluctuate annually.

Balloon Mortgage

A balloon mortgage is calculated similar to a 30-year fixed-rate mortgage except that the interest rate offered is normally lower. Monthly payments are made for a specified period of time. The loan balance is then paid in full. For example, a five-year balloon mortgage specifies that monthly payments will be made for five years. Payments are calculated as if it is a 30-year fixed-rate mortgage. After five years, the remaining balance of the loan is paid in one single payment. This type of loan may be appropriate for someone who plans to refinance or sell his or her home before the balloon payment is due.

Once you have chosen the type of mortgage to use, it is time to compare loans from several lenders. Start by requesting a Good Faith Estimate from each lender you are considering. Most importantly, when comparing loans, the type of mortgage and length of time must be the same for each estimate. In order to compare apples to apples, ask the lender to state the interest rate without points and without a loan origination fee. Points and loan origination fees tend to lower the interest rates, but increase initial costs making it difficult to compare.

Next, compare the stated interest rates, closing costs, and monthly payments on each Good Faith Estimate. Ideally, you want to choose the loan with the lowest interest rate, closing costs, and payments. However, it may be necessary to compromise. Generally, the loan with the lowest interest rate will be most beneficial to the borrower in the long run. Keep in mind that some banks are willing to negotiate, so do not be afraid to ask for a better loan.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.

 

 
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