Home buyers may choose between loans

Which Loan?

A choice that home buyers and refinancers must make is whether to select an adjustable rate or a fixed rate loan. If your income is just within the limits to buy a home with an adjustable rate loan and you expect your income to go up, an adjustable rate loan will help you buy a house now.

Since we don't know what will happen with interest rates, it may be worthwhile to make the investment. A second case where an adjustable rate loan is beneficial is if you think you might move in the next few years. You might as well take advantage of lower monthly payments based on a lower interest, adjustable rate mortgage.

For example, the payment for a $150,000, 30-year, fixed rate loan at 5.85 percent is $885 per month. The payment for an adjustable rate loan starting at 4.04 percent would be $720 per month for the first year. There are two questions you want to ask about adjustable rates: What is the most the interest can go up in one year? What is the highest the interest rate can go over the life of the loan?

What about a 15-year or 30-year loan? A 30-year loan works better for people who have little extra cash. It is better to have a savings account with flexible funds for emergency purposes than to have all of your money tied up in your home. On the other hand, if you plan to live in this home into retirement and have adequate savings and investments, paying off the mortgage in 15 years can make sense.

The interest rate on a 15-year loan is generally lower than for a 30-year loan but because the payoff period is shorter, the monthly payment for a 15-year loan is higher. For example, the monthly payment for a $150,000, 15-year loan at 5.2 percent is about $1,202 per month. The monthly payment for a 30-year loan at 5.85 percent interest is $885 per month. The difference is $317 per month, but you will pay $102,240 less interest for the 15-year loan. And at the end of the 15 years, your mortgage would be paid in full, which would free up $1,202 every month to cover other living expenses.

The Mortgage Bankers Association of America has a good educational Web site with more information about mortgages at http://www.safeborrowing.com/lenders.html.

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