Wednesday, May 18, 2011

What loan is right for you?

There is much debate as to what product makes the most sense for someone buying a home.  Some people say that you can never go wrong with a 30 year fixed rate.  You never have to worry about the payment changing and you can have peace of mind knowing your costs are fixed.  On the other end of the spectrum, Alan Greenspan, the former FED chairman made a comment a few years ago that basically said you should take an ARM product at all times.

My opinion is that the circumstances dictate the product.  Give the pros and cons of each and let the borrower decide.  Let's go over them:

FIXED RATE MORTGAGES:  This is the easy one.  As I mentioned, if you take this product, your costs are fixed in and you never have to worry about change over the life of the loan.  The perfect product for those people that are going to be in a property long term.  It's a product that for the most part, is hard to argue to not take.  What's the downside to it-you pay a premium in rate in order to have fixed costs.

People that tend to take fixed mortgage products:

   1.  Fiscally conservative.
   2.  Plan to be in the home for the long term.
   3.  Steady income earners.

ADJUSTABLE RATE MORTGAGES:  There are 3, 5, 7 and 10 year ARMs.  That simply means that they are amortized over a 30 year period but the rate is only fixed in for 3,5,7 and 10 years.  After the fixed period, the rate usually adjusts once a year for the remainder of the loan and there are caps which restrict just how high the rate can go.  The upside to the ARM products is that the rates are lower than a fixed rate mortgage.  Yes, there is more risk but with the risk comes the reward of lower rates.  This is a favorite of people in the financial world.

People that tend to take adjustable rate mortgage products:

   1.  Those that feel they won't be in the home long term and will not reach the adjustable portion of the loan.
   2.  Wall Street workers.
   3.  Bonus driven individuals that need a lower payment because of smaller base salaries.
   4.  Gamblers.  Seriously.

Again, this is about the individuals circumstances at the time they get the loan and what they project for themselves in the future.  The most important thing is that you make an informed decision weighing all the pros and cons.

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