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Getting The Loan
That's Right For You.
If you’re shopping around for a mortgage or other loan,
you’ve got a dizzying variety of products to pick from. The
choices can be confusing, but the good news is that with a
little careful planning you should be able to find a product
that meets your own particular needs.
There’s one thing all good loans have in common: a favorable
interest rate. Remember, however, that the rate you’re
quoted may not tell the whole story. Is the interest rate
fixed for the life of the loan, or can it change? Are there
closing costs, points or other charges tacked on? Make sure
you ask for the loan’s annual percentage rate (APR), which
adds up all the costs of the loan and expresses them as a
simple percentage. Lenders are required by law to calculate
this rate using the same formula, so it’s a good benchmark
for comparison.
The features of your loan -- which may be buried in small
print -- are just as important. A favorable adjustable-rate
loan, for example, protects you with caps, which limit how
much the rate and/or monthly payment can increase from one
year to the next. Ask whether a mortgage carries a
prepayment penalty, which may make it expensive to
refinance. And don’t be seduced by low monthly payments --
some of these loans leave you with a large balloon payment
due all at once when the term is up.
None of these features are inherently bad, but some do
involve risks that can be dangerous if you don’t understand
them. The key to choosing the right loan is weighing the
pros and cons of each, and then deciding which fits your
circumstances. Let’s look at a few examples:
Case 1: You’re buying your first house,
where you expect to stay for three to five years. You would
like the lowest rate you can get, even if it means accepting
a little risk.
You may want to choose an adjustable-rate mortgage (ARM),
since these usually carry lower rates than fixed-term loans.
If there’s a chance you’ll stay more than five years, you
might also consider a hybrid mortgage. This has a fixed rate
for a specified number of years -- in this case, you’d
choose a three- or five-year term -- after which the rate
gets adjusted upward or downward annually based on current
rates.
Case 2: You’ve just had a second child and
are looking to move into a larger house. You plan to stay
put for at least 10 years, and you don’t want to be sweating
about swings in interest rates.
You should likely choose a fixed-rate mortgage. In the short
term, you’ll pay more than you would with an ARM, but since
you’re in for the long haul, you’ll enjoy the stability that
comes from a consistent rate and payment. If you can afford
the higher payments, a loan with a 20-year term will build
equity more quickly than one with a 30-year term.
Case 3: You bought your home with 20
percent down eight years ago and you’re planning a $30,000
renovation. You can comfortably afford to make a second loan
payment on top of your existing mortgage.
You might want to consider a home equity loan or line of
credit for $30,000, since securing the loan with your
property will give you the lowest possible interest rate. If
your first mortgage doesn’t have a prepayment penalty, you
might instead think about getting a new mortgage with a
principal that is $30,000 higher. This is called cash-out
refinancing and has the benefit of carrying just one payment
each month rather than two. Your total payments may be lower
as well, because usually the interest rate on a first
mortgage is lower than the rate on a second mortgage or home
equity loan.
So, while finding a great loan may seem like a daunting
task, if you stick to trusted, well known companies for your
loan, they'll help match you to the best loan for you.
Additionally, those trusted companies will be more likely to
provide personalized service to answer your questions and
help explain why a particular loan product is your best
choice.
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