30-Year Fixed Rate
Best candidate: Long-term homeowners.
Over the course of 30 years, borrowers make steady, predictable payments generated by the loan's constant interest rate, even if the market rate takes a jump. Fixed-rate loans are the most conservative way to pay off a home, but have very little flexibility. Brokers generally say that this type of mortgage works best for individuals and families who know they are going to be in a home for the next 30 years. No matter what happens to the economy, your occupation, your family status or changes in your budget or lifestyle, you are committing to staying and making payments on this home for the next three decades.
20-Year Fixed Rate
Best candidate: Cash-rich homeowners.
Like the 30-Year Fixed, the 20-Year Fixed is guaranteed to offer the same interest rate throughout the duration of the loan, but in contrast, a borrower's monthly payments will be larger since it's for a shorter length of time. The upside, however, is that your home will be paid off in 20 years versus 30 years, and you may benefit from a lower interest rate. It's for homebuyers who want to stay in their home a long time (at least 20 years), but it gives slightly more flexibility than the 30-year plan. Good candidates might be a later-in-life couple or family that's considering downsizing or buying a vacation home
Adjustable-Rate Mortgage
Best candidate: Younger buyers who can tolerate more risk but want more flexibility.
An adjustable-rate loan, also known as a variable rate option, starts borrowers with a low interest rate (sometimes called a "teaser" rate) which after a predetermined length of time adjusts to the fully indexed interest rate. That rate is pegged to various indexes (about which the borrower should inquire) and is usually capped at a 2 percent increase annually.
The low interest rate allows homebuyers to afford a pricier piece of property, but the lower rate comes with risks: Once the initial period of low interest rates end, the rate is matched to the market. If the rate goes up dramatically, the ARM purchaser could find himself on the hook for a much bigger mortgage than he ever expected to pay. Of course, if the rate goes down, he could end up paying less than he thought.
ARMs can help you own more property at the outset, but for he same reason they can also force homeowners to move or refinance before they want to. For all of these reasons, brokers generally say that variable rate loans are best for those who believe they probably will stay in their home for an finite period of time, typically five or seven years, although there are 3 and even 10-year ARMs. (These loans are usually referred to as 3/1, 5/1, 7/1 or 10/1 ARMs, with the 1 a reset year before the rate "re-indexes.") Good candidates for ARMs include younger families who will need bigger places in the next few years or a professional who gets transferred to a new location every few years.
Interest Only Mortgage
Best candidate: Younger, risk-tolerant borrowers with erratic incomes or financial wizards.
An interest-only mortgage allows you to pay just the interest on a mortgage in monthly payments for a fixed term, and when that period (typically 10 years) is over, you can refinance, ante up the balance of the loan in a lump sum -- or watch your payments spike to pay off the principal. The reason for the spike: Interest-only loans don't carry simple (not compounded) interest like most other loans. Since you are only paying interest during the first 10 years of your loan, you are essentially drawing down the interest payment until you actually get to pay down your balance. Thus a key incentive for interest-only loans is that if you are disciplined enough to pay more than your regular monthly payment, you can actually lower your monthly nut. (You're paying interest-only, with no compounding.) Interest-only mortgages usually are only recommended for an individual with erratic income, such as large but infrequent commissions or bonuses. But savvy money managers also may use this type of mortgage to bet that investing savings on the difference between an interest-only mortgage and an amortizing mortgage will save money.
FOR ADDITIONAL MORTGAGE INFORMATION CONTACT BEVERLY MCCORD TODAY AT 703-943-8214 OR 540-931-3655, EMAIL: beverly@beverlymccord.com
