Select the right loan program

Home loans come in many shapes and sizes.  Deciding which loan makes the most sense for you financial situation and goals means understanding the benefits of each.  Whether you are buying a home or refinancing, there are 3 basic types of home loans.  Each has different reasons you'd choose them.

1. Fixed rate mortgage

Fixed rate mortgages usually have terms lasting 15 or 30 years.  Throughout those years, the interest rate and monthly payments remain the same.  You would select this type of loan when you:

• Plan to live in home more than 7 years
• Like the stability of a fixed principal/interest payment
• Don't want to run the risk of future monthly payment increases
• Think your income and spending will stay the same

2. Adjustable rate mortgage

Adjustable rate mortgages (often called ARMs) typically last 15 to 30 years, just like fixed rate mortgages. But during those years, the interest rate on the loan may go up or down.  Monthly payments increase or decrease.  You would select this type of loan when you:

• Plan to stay in your home for a limited amount of time
• Don't mind having your monthly payment periodically change (up or down)
• Comfortable with the risk of possible payment increase in future
• Think your income will probably increase in the future

3. Combination rate mortgage

Combination rate mortgages combine fixed interest rates and adjustable interest rate.  Lenders often refer to these loans as hybrid loans.  For the first few years (3-7), the interest rate is fixed.  It remains the same and so does your monthly payment.  During the remaining years of the loan, your interest rate becomes adjustable and can vary.  You would select this type of loan when you:

• Want the stability of a fixed principal/interest payment in the short term
• Want to repair your credit by demonstrating your ability to make regular payments, then refinance for a lower interest rate
• Have a lot of consumer debt (these loans typically allow more)
• Want to borrow more and get a lower monthly payment than a standard fixed rate

In selecting the best loan program, it is helpful to understand the relationship between rates and points.  Points are considered to be prepaid interest and are tax deductible.  Each point is equal to 1% of the loan amount.  So for example, 1 point on a $250,000 loan is $2,500.  The more points you pay, the lower the rate you will get.

By carefully considering the above factors and seeking our professional advice, you should be able to select the one loan that matches your present condition as well as your future financial goals.