Recs

3

What Type of Mortgage Should You Get?

So you're thinking of buying a home. Good for you! Building equity is a smart thing for many of us to do. But if the recent subprime mortgage crisis has taught us anything, it's to be careful about how we borrow for a home.

At MSN.com, columnist Liz Pulliam Weston offered two rules of thumb that I found very sensible. Permit me to share and expand on them:

First, she noted, "If you can't afford to buy the house using a 30-year fixed-rate mortgage, you can't afford the house." This is sound advice, because buying a home with such a traditional mortgage is a rather conservative approach. Let's review an example, from Bankrate (Nasdaq: RATE  ) survey data from Feb. 27:

30-Year Fixed

5-Year ARM

Rate

6.41%

5.68%

Monthly payment

$1,033

$956

Adjustable-rate mortgages (ARMs) have typically been less expensive -- at least initially -- but once they start adjusting upward, they can wreck havoc on your finances. Remember that with interest rates not that far from historic lows, odds are that rates will creep back up over the coming years. Meanwhile, ARM interest rates have suddenly skyrocketed, as well. Today, many 5-year ARMs suddenly sport interest rates above 30-year fixed rates. At Wachovia (NYSE: WB  ) , for example, I recently spotted a 30-year annual percentage rate of 5.758%, vs. a 5-1 ARM rate of 5.875%. At Washington Mutual (NYSE: WM  ) , I found a fixed rate of 5.883%, vs. a 5-1 ARM rate of 6.899%. (It pays to shop around!)

Still, if an ARM offers you a lower rate than a fixed-rate mortgage, it could be the smarter option -- as long as you don't plan to stay in the home for long once the ARM starts resetting its rates. Which brings me to Weston's next guideline: "Fix the rate for at least as long as you plan to be in the home." If you plan to be there indefinitely, look at 15- or 30-year fixed mortgages. If you're pretty sure you'll be selling and moving within seven years, consider the 7-1 ARM, featuring a fixed rate for the first seven years. This kind of approach reduces the chances of your being very unpleasantly surprised when your monthly mortgage payment jumps by 25%.

Learn more in our Home Center and in these articles:


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 608989, ~/Articles/ArticleHandler.aspx, 9/16/2014 1:15:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

Today's Market

updated 3 hours ago Sponsored by:
DOW 17,031.14 43.63 0.26%
S&P 500 1,984.13 -1.41 -0.07%
NASD 4,518.90 -48.70 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/15/2014 4:02 PM
RATE $11.92 Down -1.90 -13.75%
Bankrate CAPS Rating: *
WAMUQ.DL $0.00 Down +0.00 +0.00%
Washington Mutual,… CAPS Rating: No stars
WB.DL2 $5.54 Down +0.00 +0.00%
Wachovia Corp CAPS Rating: **

Advertisement