FRM vs. ARM
There are several factors one must consider when deciding between getting a fixed rate mortgage and an adjustable rate mortgage. Who should get a fixed rate mortgage (or FRM)? An FRM is ideal for someone who needs the guarantee of payment stability that the fixed rate offers – since the rate is “fixed,” it will not increase and therefore you won’t have to worry about your payments skyrocketing or putting an extra, unanticipated strain on your finances. That being said, FRM’s usually have a higher monthly payment, and as such you must be sure that you can afford it. FRM’s are also good for individuals who expect to have a long-term mortgage, particularly one that will last for more than seven years.
As the monthly payment associated with adjustable rate mortgages (ARM) are usually lower than FRM’s, this option is good for people who need to save every penny. If you cannot afford the FRM payment or anticipate moving within seven years, then an ARM is the right choice for you. One of the reasons why the ARM is good in this situation is because there will be less time for the ARM rate to increase and become more of a burden. The longer you have an ARM, the more time there will be for the rate to possibly increase, so they are better for short-term loans.
If you do go with an ARM, consider making larger payments when you have the money for it. In doing so, you’ll lower the loan balance faster, and thus if rates do go up, your increased payment won’t be as high as it could’ve been.
Purchasing a House With All Cash
If you have large amounts of cash available, you may wish to consider purchasing a home with all cash. The best way to examine this situation is to look at it like an investment. However, the investment is not the house – you would enjoy any appreciation of the house’s value whether you obtained a mortgage or used cash. The investment is in the mortgage you would be escaping if you paid for your house with all cash.
If the house you wish to purchase is priced at $500,000 and you have that amount of cash currently available, let’s say you have two options. You can get a 20-year fixed rate mortgage at 7%, or you can pay with all cash. If you go with the mortgage, think about all the money you’ll spend over those 20 years in interest alone. If you pay with cash, however, you can consider those savings as an investment. Yes, you’ll lose all of that cash, which is extremely liquid, but you’ll have a mortgage-free house with no mortgage, and thus you can analyze the situation in terms of how much money you’ll be saving.
Additionally, if your house has no mortgage on it, then you’ve actually got another method to obtain more liquid wealth. Since your home has no liens on it, you could obtain a home equity loan in a matter of days, and probably get more cash than you would have been able to get with a mortgaged house. Consider all these options when deciding whether to purchase a house with cash only.
Negative Points
Mortgage “points,” a payment made to the lender upon closing the loan, is fairly common among US mortgages. Each “point” is equal to one percent of the total loan amount, and generally the more points you pay, the lower your interest rate will be (and vice versa: the fewer points you pay, the higher your rate). Another possibility is that of “negative points,” in which the lender actually pays you a percentage of the total loan amount upon closing the loan. For example, in a traditional loan of $100,000, you might have a choice between 3 points ($3,000) and a 6.5% rate, or 1 point ($1,000) and a 7% rate. Another choice, however, might be a loan with -2 points and an 8% rate. In this case, the lender would pay the borrower $2,000 in exchange for an even higher interest rate.
The money paid to the borrower through negative points must be used to help compensate for the settlement costs. It cannot be used to cover the down payment or anything else. That being said, if you are considering getting a loan with negative points, you must first analyze and determine what your final settlement costs will be. Once you have verified what they will be, get a loan with negative points equal or lesser to these settlement costs. For example, if your settlement costs will be $3,000, -3 points on a $100,000 loan will cover them perfectly. Any more than those -3 points and you’ll just be wasting money.
Keep in mind that the more negative points you get, the higher your interest rate will be. Therefore, a loan with negative points is most valuable to those who do not plan to have the loan for very long, and thus won’t have to deal with the high interest rate in the long-term. If you do plan on having a long-term mortgage, it is best to find another option besides negative points, as negative points drive up the interest rate very quickly (for every negative point, the rate may increase by .5%).
Search
