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October 9, 2009, Newsletter Issue #188: How to Compare Purchase Mortgages
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Tip of the Week
First, have a game plan for yourself. Ask yourself some questions. How long do you plan to keep this house? How do you feel about your income security and future income? How much down payment and closing cost cash will you have? If you want a fixed rate loan, compare rates and closing costs of different choices.
If you are leaning towards an Adjustable Rate Mortgage (ARM), concentrate on adjustment caps, lifetime cap, the index used (the base rate) plus the margin (the amount added to the index to determine your rate). Do not just be concerned about the start rate on 6 month, 1 year or 2 year ARM’s. The index, margin, adjustment and lifetime caps are equally important. If this property is merely a “stepping stone” that you will keep for four to five years, an ARM may be a better choice since you won’t care what the rate is 14, 21, or 23 years from now.
Compare closing costs vs. rate carefully. A loan with very low closing costs but a higher rate will cost you a lot more if you keep this mortgage more than a few years depending on the contract rate. The Annual Percentage Rate (APR) is the critical number to compare. This shows the true cost of a mortgage to you over the life of the mortgage, including the closing cost factor and the effect of rate changes if you’re analyzing an ARM.
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