Owning a home is often the largest asset in one’s portfolio. Choosing the correct mortgage for your financial planning and security is an important decision that should be taken seriously.
Making the right decision can save money, both in the short and long term, while making an unwise decision can cost you money, even jeopardizing the ownership itself, and cost you all the ramifications that comes with it. Selecting the correct mortgage starts with using an adviser who not only understands your needs, but makes sure to address the important considerations.
The most common mortgage is a 30-year fixed rate loan. It is safe because the rate never changes during the loan and you know exactly what each monthly payment will be during the term of the loan. Given the bias of Elite Financial to guide people towards the safest mortgage, we often suggest the 30-year fixed loan as an excellent choice to ensure one’s financial security.
The 15-year fixed mortgage shares the safety of the 30-year loan, in that you know exactly what your rate and payment will be during the 15-year term of the loan. The benefit of the 15-year loan is a lower interest rate compared to the 30-year mortgage. Each monthly payment pays more towards the principal balance and less towards interest, thus paying down your loan faster, and therefore paying off the loan faster. Elite Financial prefers the shorter term loan because less money is paid towards interest, and even if you sell or pay off your loan early, you will have reduced the principal amount owed.
The 10-year fixed rate loan enjoys the same benefits as the 15-year mortgage, with an even lower interest rate and increased payments towards the principal balance instead of interest. Although the 15- and 10- year loans will save you a considerable amount of interest, and thus money, the payments are higher because the loan is amortized for a shorter period of time.
Although it may not be comfortable to make the payments on a 10- or 15-year loan, which is an extremely important consideration, the loans are also harder to qualify for when applying for a mortgage. An excellent alternative, especially once the payments become more comfortable to make as income increases over time, is to make additional principal payments on a 30-year loan. Often people are sold a bimonthly payment loan tool, which correctly states that you pay down your loan quicker – one-half payment made every two weeks generates one extra payment per year. In reality you are paying a company a fee for basically holding your money until you accumulate that extra one-month payment – something you can accomplish by including 1/12th of your payment with every regular mortgage payment made – while also giving yourself the option of making the payment when comfortable, instead of being restricted to the bimonthly payment arrangement.
The additional principal payments will help you pay off your loan quicker, and thus pay less interest overall on your loan. This is a very important tool you can use to save your money and not pay the lender more interest.
Adjustable rate loans have had a negative stigma ever since the economic downturn. When considering an adjustable loan, understand you are taking on a greater risk – your interest rate can change during the term of your loan. With that risk, you will be offered a lower interest rate in exchange, and knowing your risk and options is extremely important. For people who plan on being in the home for the long term (not selling or refinancing in the near future), this loan option may very well be a risk not worth the benefit of a lower rate and payments. But for those who know they will keep the loan for a shorter time, this loan type can be an excellent tool to save a considerable amount of money.
The most common adjustable loans today are the 10/1, 7/1, 5/1 and 3/1 mortgages. All these loans are amortized over 30 years. The interest rate is fixed for the time of the first number, thus a 10/1 ARM will have the initial rate for 10 years (7/1 has the initial rate for 7 years, 5/1 for 5 years, etc.), before the loan becomes an annual adjustable, meaning the rate is subject to change every year. An adjustable loan is calculated, after the initial fixed period, by adding the margin (the profit for the lender) to the index (Treasury Bill, LIBOR, Prime rate) – the combination of the two equals the rate for the next year (remember, this is after the initial fixed period).
In the past, payment options for these loans were less than what was needed to pay the amount of interest due, increasing the amount due. This is negative amortization, and not what is offered in loans today (often people took this loan option to obtain the lowest payment available, but often not understanding that the loan balance actually increased). Further, the interest rate on these loans typically changed monthly – again not what is available today.
The benefit of the adjustable, the lower interest rate, is an excellent tool when you know the loan will not be held for the full term. To be safe, Elite Financial suggests that if you consider this type of loan option, then take the loan with a longer fixed period than you plan to keep the loan. In other words, if you plan on keeping the loan for five years, consider taking the 7/1 or 10/1 loan – as sometimes our best-laid plans often don’t work out in the expected time frame. The truth is most people do not keep their loan for 30 years, so an adjustable loan is an excellent tool to save interest and money. By taking the adjustable loan for a fixed period for a little longer than you think you expect to have the loan, you build in a little more security of not having to worry about your interest rate and payment increasing.
The savings of an adjustable loan can be substantial, but this loan tool is NOT for most, as the security of knowing exactly what your payment will be helps one sleep better at night, while most important, also reduces the risk of not being able to afford your loan in the future. Consider your risk tolerance, and if you believe this is a viable choice to save money, compare the payments between the fixed and adjustable loan to determine if the savings is worth the risk. Elite Financial loan officers are experienced in giving you the facts and data to make this important decision. Choosing wisely can give you the security you want, and savings you may want to consider.
Elite Financial has been funding loans from its Westlake Village Office since 1988. Westlake Village is located in the Conejo Valley, which also consists of Thousand Oaks, Newbury Park and Agoura–and just outside Camarillo. Elite Financial funds loans throughout California.