Which loan is right for you?
Fixed, ARM, neg am, 5/1, 10-year fixed…these and many more are the choices before you as you shop for a loan for purchase or refinance. Which one is right for you?
There are three questions you need to ask yourself?
1. What is your budget?
Your payment plan has to fit your budget and ability to pay. For example, I would love to have my house paid off in 15 years, but the monthly payment on a 15-year loan is about 30% higher than a 30-year loan. Can I afford the payment?
2. How long do I forsee keeping this property?
If you think you will very likely sell your property within 5 years, you may want to get an adjustable rate mortgage (ARM). However, if you foresee yourself moving, but you will keep the property as a rental, you will want to choose a fixed rate loan to eliminate the risk of rates going up in the future.
3. Do you think rates are likely going to go up or down in five years?
This is your judgement call base on your own research and prediction. No one can give you any kind of guarantee. I’ve seen home loan rates as high as 16-18% in the mid ’80s, and as low as 4% in the past years. If you think rates will go up, you would want a fixed rate so your payments will not change. If you think rates will not go up, or even possibly go down, you would want an adjustable rate to take advantage of the lower rates.
If the fixed rates are relatively low, I prefer getting a fixed rate loan. Even if you think you will sell within five years, you don’t really know what the future holds. If you may end up living there longer, or keep the property as a rental, you will have a nice low fixed rate, even if the market rate goes up.
Nowadays, there is hardly any difference in the rate between a short term loan like a 5- or 7-year loan. Do the math and see what the dollar difference is in the best and worst case scenerios.