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How to Pick the Right Loan
To land a home loan you can live with, consider a mortgage matched to your lifestyle.
Think of matching your current financial needs and aspirations to where you are today and the near future. As Broderick Perkins, noted real estate author, puts it, use a “Lifestyle-based mortgage matching strategy and you’ll likely land a loan you can best afford that also makes the most financial sense for you.”
First Time Home Buyers
The reality is this is your first home but not your last home. Typically first timers are younger with an income stream that will grow substantially in the next few years. With this new wealth will acquire new and upscale household improvements, new families, new and larger acquisitions. The house will become far too small and the first move up home occurs.
Since first-timers will more than likely move with the next three to seven years, it makes good sense to look at hybrid adjustable (ARM) loans like a five to seven year ARM that keeps the payment the same over that period of time. The interest rate is typically lower than a 30 year fixed.
For those caught up in today’s high price of homes, an interest only feature adds to their “buyability”, cutting the minimum payment down about 15% to 20% than the typical fully amortizing ARM and thereby increasing their shopping range by that amount. As their incomes rise, they can afford to pay down principal by adding more to the payment. Many, in recent years, have allowed the equity increase as the price of homes increased while making the lower payment since the worst is the balance remains the same.
Movin’ On Up
Older, with young families and a different lifestyle than when they first bought, this second home will likely be their home for the next five to ten years, maybe more. Kids like parents, will grow community roots and friends that makes moving again difficult. For some, a third bigger home in the same school district is possible. Because of this possibility of another move, the hybrid ARM is still very attractive with the options being the seven to ten year ARM. And of course, some will swear this is the last home, and a 30 year fixed is just as attractive.
Just You and Me, Honey
Ah, what most parents can’t wait for, or so they say, the kids actually do move out and you now have a much larger home than what you need. It’s older now, and needs more maintenance and care, work you may opt not to do now. Who uses the swimming pool any more? Moving down to a smaller home is a reality.
Do you really need a mortgage? Well, like many people today, you probably still have a mortgage at this time – after all, you had a family to raise and other goals to meet. Hopefully you have sufficient equity however to pay cash for the next home. The tax law has changed in recent years and you can now take up to $500,000 capital gains tax free. (Do consult with your tax adviser)
If a loan is still needed however, consider a shorter term 10 to 15 year mortgage to pay off just before retirement.
Compare Loans Side-by-Side
When choosing between different loan programs, be sure to request a side-by-side comparison of the loans being considered. This comparison should give you some idea of the payments differences, for sure, but also gives you insight on cash flow and investment management – what could you do with the difference in payments if invested at a certain return on investment percentage.
The benchmark for all loans is the 30 year, fixed rate mortgage so be sure this is included in your loan comparison. It’s the loan you read or hear most about as it’s the most utilized and the most talked about.
Depending on where you sit in the lifestyle cycle, add in a hybrid ARM. For first timers, you may want to have the interest only feature thrown in to add dramatically to your buying power and compare the three, five and/or seven year. For the second or third home, you might want just a straight hybrid ARM comparing the seven year and ten year. 40 year amortizing loans are available as well.
If you are self employed and/or have erratic but higher income streams, consider an Option ARM or a Flex ARM. Much more volatile than the hybrids, it gives you much lower payments by deferring interest until you make higher income later. You can make up the interest added to your loan and then some at your choice.
Empty nesters will want to consider pretty much all fixed rate products.
For a side-by-side comparison at no obligation, complete the information below and it will be emailed to you at no charge.
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