BUYERS' CORNER

Financing Tips

If you have already determined that you can afford to buy a home-that is reviewed the tips in Where To Begin-then you're ready to consider your financing options. Although mortgage rates are near their historic lows, choosing the one that is right for you is like searching for a pub in Dublin. You'll be dizzied by the choices.

One of the first questions you must answer is whether a fixed or adjustable rate is your best choice. To help you decide, answer the following questions:

How long do you expect to be in the home? While you probably can't answer with certainty, you should make an estimate. If, for instance you're unmarried but expect that to change in a few years, then you'll probably want to trade up at that time. Or, if you expect your family to grow within the next few years, you may need a larger home at that time.

Is your job situation stable without reasonable possibility of transfer? While few positions are as solid as they might have been a few years ago, you should have a good idea of your current job stability.

If you think you will move within the next three-to-five years, then an adjustable rate loan (ARM) may be the best choice. The rate will generally be lower than for fixed rate loans and will save money in the short term. However, the rate on most ARMs will increase after the first year, tied to certain financial market indexes. While the initial rate is low, it can increase substantially over the life of the loan; and for those owners who are still in their home and unable to refinance, the results can be disastrous. Homebuyers choosing an ARM should be confident that their income will support the higher payment or that they can sell their home as planned. However, those who plan to remain in a home for ten years or more should opt for a fixed rate. They'll be protected against further increases in interest rates and will know exactly how much their payment will be for the life of the loan.

If your best choice seems to be a fixed rate loan, you'll have to decide how many years the loan should run. Generally, the choices are 15 yr., 20 yr., or 30 yr. If you have sufficient steady income to make the higher payments of a shorter term loan, then do it. You'll save thousands in the process. If, however, your income varies or you expect it to rise within a few years, a longer term loan will be the best option. While you will give up the advantages of paying off your loan sooner and the associated savings, you can still accomplish almost the same thing by adding extra dollars to your principle payment at those times when you have the extra cash. (This strategy works with all those loans with no prepayment penalty) You will save thousands and shorten the term of your loan if you will increase your principle payment by about 10%, and you won't be forced into the higher payment of the shorter term loans.

Balloon mortgages offer still another option; however, they also carry substantial risk. At the expiration of the term of the loan, the full balance becomes due or must be refinanced. Their rates will generally be about ½ point below 30-year fixed rate loans. Buyers who feel certain that they can sell or refinance before the expiration date may want to consider this option, but must be aware that the value of the home may not appreciate as expected or that interest rates when it's time to refinance could be significantly higher.

Finally, you should always get quotes from several lenders and compare the bottom line. The terms and conditions will vary and the best deal isn't always the lowest rate.