Although the housing and banking sectors are currently in turmoil, there are great real estate deals for those looking to buy a home, and exceptional mortgage loan rates available. Yes, there are people out there in a position to purchase, and if you fall into this category it is important to choose the right mortgage.
1. How Long will You Stay?
Consider how long you plan to live in the home you are shopping for. The length of time you plan on living in the home makes a huge impact on the type of mortgage best suited for you and, in the end, how much money you spend. Consider the following guidelines:
If you are planning to stay:
1 or 3 year adjustable rate mortgage (ARM)
5 or 7 year ARM or balloon
10 year ARM, 15-30 year fixed-rate (FRM)
2. What are Your Goals?
You need to decide fairly early on in the process whether you want a lower payment or if you want to accumulate equity faster. Lower payments allow buyers to save money they would otherwise spend on a large mortgage payment for retirement, their children's college funds, or to pay down other debt. Alternatively, those interested in building equity faster have a likelier propensity to make a profit on the sale of their home, or paying it off and owning it free and clear faster.
If you want...
1-7 year ARM or 30 year FRM
15-20 year FRM
3. What Do You Think the Future Holds?
Interest rates play a major role in mortgages, and it is important to understand their fluctuation and how that movement affects mortgages in order to choose the best mortgage loan for your situation.
If you think interest rates will:
Raise in the future
15-30 year FRM, 7-10 year ARM, or 7 year balloon
Fall in the future:
1 year ARM
Stay fairly stable in the future:
1-7 year ARM
4. What is Your Risk Tolerance?
Risk tolerance is the level of uncertainty you can handle. If you are comfortable with the idea of having a great deal of your retirement money in the stock market where there is a chance of substantially higher returns but also a large chance that you may lose it all, then your risk tolerance is higher than an individual who would rather have his or her retirement money in a savings account or CD, where there is no risk of loss but there is a much slower, guaranteed rate of growth. Mortgages are very much the same as the above-stated scenarios. Some loans set their interest rates based on the markets, while others do not; this leads to fluctuation in the interest rate of the loan, and fluctuations in the monthly loan payments.
If You Are:
Comfortable with fluctuation
1-7 year ARM, 5-7 year balloon
Uncomfortable with fluctuation:
15-30 year FRM or a 10-year ARM
The banking industry currently has money to lend, but the economic environment is so volatile that there are not many borrowers lining up at the bank doors; this is beneficial to those looking for mortgages, as it is truly a buyer's market. Choosing the right mortgage loan for your goals is a very important financial decision, so get as much information as possible and then choose the loan that is right for you.