Spring 2011 – Special Edition: Shop and Save…at the Bank
Mortgages: Different Products for Different Needs
Although the recent financial crisis reminded the nation that real estate values can and do go down, history tells us that owning a home over many years can be one of the best ways to build wealth. If home ownership is still part of your American dream, here are tips for getting a mortgage that meets your needs and your budget.
Start by considering whether a fixed-rate loan or an adjustable-rate mortgage (ARM) is right for you. Fixed-rate loans offer stability in the payment amount, while ARMs generally offer lower initial payments.
A good rule of thumb, especially if you intend to own your home for more than a few years, is to consider a fixed-rate loan even if ARMs carry a lower initial interest rate. A fixed-rate loan can provide peace of mind over many years, especially given that other housing costs — such as real estate taxes, insurance and home upkeep — are likely to rise in the future.
As you comparison shop:
Be sure to use the Annual Percentage Rate (APR) as a key point of reference. The APR is the cost of the loan expressed as a yearly rate. It includes the interest rate as well as certain other costs, such as "points." (Points are one type of fee paid at closing by the borrower to the mortgage lender. Each point equals one percent of the loan amount. There are two types of points: those charged by the lender to recover some of the costs of originating the loan, and those that the borrower agrees to pay to "buy" a lower interest rate.) Remember that with an ARM, the interest rate can and likely will change over time and may increase to a rate you can't afford.
Review the lender's "good faith estimate" of settlement charges, which will include some fees and costs that are not included in the APR. Closing costs can vary from lender to lender.
Remember that you can negotiate the rates and terms of a mortgage. "If you find a loan you like from one lender but you'd rather borrow from another bank, ask that bank about matching it," said Glenn Gimble, an FDIC Senior Policy Analyst. "Even if the other bank can't match the loan exactly, it may be able to offer other favorable terms or cost savings."
Don't be shy about talking to lenders about other ways to keep costs down. You may be able to save thousands of dollars in interest — depending on the amount of your loan and the interest rate — by working to pay off the mortgage in less than the standard 30 years. Even if you don't choose a mortgage with a shorter term (such as 15 or 20 years), you can get similar results by paying an additional $50 or $100 each month or one larger payment once a year.
"And if you plan to stay in the house for many years, it may be worth it to pay an extra point or two if that gets you a lower interest rate on a long-term, fixed-rate mortgage," Gimble explained.
For more information, read Looking for the Best Mortgage, a free consumer brochure published by the FDIC and other federal government agencies. And if you think you need additional guidance on buying and financing a home, consider talking to a no- or low-fee housing counselor approved by the U.S. Department of Housing and Urban Development (start at 1-800-569-4287 or www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm).