DiscoverMilwaukee2017 - page 68

period of time, because they plan to purchase a different
home or relocate, or for people who plan to refinance at a
lower rate sometime in the future. This may be true for
young, first-time homebuyers who need the lower
interest rate the ARM provides to afford the home they
want, but who are confident the economy and their
personal finances will improve enough over a short period
of time so they will be able to lock in a better interest rate
down the road.
What features should I look for in an adjustable-
rate mortgage?
In addition to shopping around for the best interest rate,
homeowners should take a close look at the fixed term of
the mortgage and the amount the lender can increase the
interest rate when the fixed term expires. Many ARMs
have a 1-year, 3-year, 5-year or 7-year fixed term during
which the interest rate is guaranteed. After the term
expires, many ARMs allow lenders to raise the interest
rate by 2 percentage points a year or 6 percentage points
over the life of the loan. These caps, which provide some
protection against sudden, significant jumps in interest
rates, may be negotiable.
What are interest-only mortgages and can they
be beneficial?
With an interest-only mortgage, 100 percent of the house
payment is used to pay interest costs. None of the money
is used to pay off the loan principal. These mortgages are
typically used by property investors who are confident
the value of the property will appreciate significantly
before they sell. These mortgages are also used by
executives whose principal income is from bonuses
and/or commissions. They can keep their home payments
low and use the bonus or commission to pay down the
principal. These loans can be risky, because a drop in
market value could prompt the lender to foreclose on the
loan.
What are points and when is it beneficial to pay
them upfront?
Points are pre-paid interest that allow you to reduce the
size of your house payment. Each point represents 1
percent of the mortgage amount. Generally speaking,
they are not beneficial for people who plan to stay in the
home for a short period of time or who plan to refinance
in a few years.
What are the benefits and disadvantages of
fixed-rate mortgages?
Fixed-rate or fixed-payment mortgages are the most
popular types of mortgages because they offer a
guaranteed interest rate over the life of the loan. In order
to make this long-term guarantee, lending institutions
typically charge a higher interest rate for fixed-rate
mortgages. This results in higher house payments and
potentially higher interest rate costs. Generally speaking,
fixed-rate mortgages are most advantageous for people
who either plan to own the home until the mortgage is
paid off or plan to live there for a long time (more than
seven years).
If I choose a fixed-rate mortgage, which is
better for me – a 15-year or 30-year loan?
15-year mortgages typically feature lower interest rates
than 30-year loans, because the lending institution is
tying up its money for a shorter period of time. In
addition, because 15-year mortgages are paid off in half
the time, the homeowner pays considerably less in
interest costs. With a 30-year mortgage, for example,
most of the monthly house payment will go toward
interest costs for the first 23 years of the loan. Looked at
another way, a homeowner with a 30-year mortgage will
end up paying three times the cost of the home in
interest and principal payments. A homeowner with a 15-
year mortgage, on the other hand, will pay only twice the
purchase cost. The primary benefit of a 30-year
mortgage is the lower monthly payments it offers, which
can help a homeowner purchase “more house” or a home
in a more desirable location.
What are the benefits and disadvantages of
adjustable-rate mortgages?
Adjustable-rate mortgages (ARMs) change with interest
rates. The initial interest rate is lower than the prevailing
rate for fixed-payment loans, but that rate is only
guaranteed for a short period of time – 1-year, 3-year, 5-
year and 7-year terms are common. At the end of that
period, the homeowner will have to pay whatever the
market is charging. If interest rates are higher, they will
pay a higher rate; if interest rates have dropped, they will
pay a lower rate. ARMs are generally recommended for
people who do not plan to live in a given home for a long
Frequently Asked
Questions About Home Financing
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