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
|
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
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:
