Getting Back to Mortgage Basics

Analyzing the Alternatives

If you expect to move in two or three years, an adjustable rate mortgage (ARM) may make more sense than a 15-year loan because an ARM starts out at a lower interest rate. Quite often, you can get these types of loans with an interest rate “lock” for several years, after which the rate may increase. However, with a 2 percent annual interest rate cap, these loans can still be quite manageable in the short-term.

Deciding which mortgage is best for your long-term financial plan is sometimes difficult. Analyzing the various alternatives is a smart way to produce long-term savings. A qualified financial professional can help you determine which option best fits your needs and current situation.


(Mr. Wallace holds NASD Series 7 (General Securities) licenses and Group I and IV Life-Health Insurance Licenses. He is a Registered Representative of MML Investors Securities, Inc., an Investment Advisor Representative of Spectrum Strategies, LLC, and an Investment Advisor Representative and Registered Representative of MML Investors Services, Inc. You may reach him @ ejwallace@finsvcs.com or visit his website at spectrumstrategiesllc.com.)

Significant Financial Responsibility

Still, accompanying the excitement and sense of pride associated with home ownership is a significant financial responsibility, which usually takes the form of a mortgage.

Mortgages come in different shapes and sizes. The terms of a mortgage directly impact how much you can borrow, how much you'll pay per month (or other interval), and how long you'll need to make payments. Generally speaking, the longer the mortgage, the more interest you'll pay in the long run. So, naturally, you would think a shorter mortgage would be better, right? Well, it depends.

In recent years, the 15-year mortgage has gained in popularity for many home buyers. Undoubtedly, the idea of saving thousands of dollars in interest over the life of the loan has something to do with its appeal. But a 15-year mortgage may not always be the best choice, particularly for those buying their first home.

Repayment Strategy

Deciding you want a 15-year mortgage before you have decided on the home you want to buy can significantly limit your buying power. You may not qualify to buy as much house with a 15-year mortgage as you can with a 30-year mortgage loan. Even though the interest rate may be lower on a 15-year loan, the payments will be higher than on a 30-year loan.

For example, the monthly payment on a $100,000 mortgage financed over 15 years at 7 percent is roughly $899, compared to about $699 for 30-year financing at 7.5 percent. As a result, your lender will require a higher income to qualify for the 15-year loan.

If you're willing to make the higher payments, you may not need a 15-year loan to reap at least some of the savings in interest, over the life of the mortgage. On most 30-year mortgages you can prepay as much principal as you like without penalty. So, you can take out the 30-year loan, make the $899 payments as if it were the 15-year loan, and drop back to $699 whenever things get tight. This flexibility allows the extra cushion you may need if other variable home expenses start to rise, such as home heating oil or insurance.

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