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Guest

I am shopping for a $450K loan for my first home. I like to get a loan that offers low monthly payment, yet allows me to make extra payment every month to principal without penalty. What type of loan is right for me, 30Yr fixed rate ? Pick a payment ? ARM ?

jameshogg

Hi Max,

Welcome to forums.

I think 30 year fixed will be a good choice considering the fact that Option ARMs most often allow lead to negative amortization, that is, you will owe more than you have borrowed. For instance, the minimum payment option ARM will allow you to pay a monthly installment which is even lower than the required interest.

The unpaid interest then gets added to the principal each month and this creates the negative amortization. After a certain period of time, when your loan balance outgrows the amount borrowed, the lender may recalculate your payments and that could make your monthly payments go up.

Thanks,
James.

Guest

yes James,

Even with interest-only payment option ARMs, managing the loan can be risky. Once the interest-only payment period ends or the loan is recalculated, the interest rate goes up and hence payments go higher. And, it may not be that easy to cope up with the payment rise.

jerry

Hi Max,

Interest-only or Option-ARM minimum payments may be risky if you are not able to afford the higher monthly payments in the future interest rate increases when the I-O period ends, or when the loan is recalculated.

Compared to interest-only loan, I think the 30 year fixed rate will be better, as you will need to make more or less fixed monthly payments. But you need to check out the rates lenders are offering on fixed rate loans in your state of residence.

Thanks,
Jerry

wablola · Posted: Wed Feb 14, 2007 9:37 am Post subject:

Hello Max,

Welcome to the forum!!

Here is a great link from this site which may provide you more information on the different types of loans.

http://www.mortgagefit.com/loan-programs.html

Hope this helps.

kenstampe · Posted: Thu Feb 15, 2007 10:40 am Post subject:

max,

a fixed period ARM like a 5/1 or 3/1 (5/1 = fixed for 5 years then adjusts every 1 year) is typically best suited towards a buyer who does not plan on staying in the home for a long period of time. A first time homebuyer typically doesn't stay in the home more than 5-6 years and so a 5/1 arm is often appropriate.

That said, I don't know your situation. Perhaps you are a 42 year old first-time homebuyer with 3 kids and once you buy you are there for at least 10 years until your kids are out of grade school. If this were the case a 5/1 arm would be a bad choice.

Max, you are asking a question of "suitability" or "fit" and to accomplish that you really should be talking to someone who is asking you a lot of questions about your financial situation, present and future. It would be like you asking me what kind of business suit you should buy.

The last time I went shopping for a business suit I was asked the following questions:

what do you do?
do you travel?
who are your customers?
what do your bosses wear?
how often will you wear this suit?
what shoes/shirts do you already have?
what other suits do you already have?
are you more interested in being seen as conservative or liberal thinking?

These questions were to buy a $1,000 article of clothing! Think about the needs we have to "fit" you into the right mortgage loan!

good luck.

Guest

Hi Ken,

Thanks for your advise. Here are my goals:

1. I only plan to stay in the new house for 10 years. The particular area I am looking at to buy a new house has good elementary school but bad intermediate and high schools. So, I plan to move 10 years later when my baby is out of elementary.

2. My wife and I both work and we have stable income. However, I prefer low monthly payment to prepare for unforseen situation like losing a job, ..etc

3. With low monthly payment, I like to have the option to make extra payments to principal each month (of course,without penalty) and reduce the overall interest paid at the end of the term.

I know I might be asking for something unrealistic here..a loan that offers savings + flexibility !!!

Any advise is very much appreciated. Thanks!

max

Guest

I would say you look for a 15 yr FRM, as you do not plan leaving before 10 years. You have stable income which will help you get better rates but should have pretty decent credit score also. If you can afford making extra payments then it will help cut off a number of years out of your total loan term.

kenstampe · Posted: Fri Feb 16, 2007 4:45 pm Post subject:

Very nice information. It's almost like we are having a conversation....

I'm sure there are others who will have a different opinion but my suggestion would be a 30 year fixed rate featuring a 10 year interest only period. For the first 10 years, you only HAVE to make an interest only payment. That means if you get sick, lose your job, etc. you have a lower "required" payment to keep on time.

If you pay additional principal against a 30 year fixed rate, fully amortizing loan, your monthly payment stays the same for 30 years....you just pay a greater portion of that monthly payment towards the principal instead of towards the interest.

On an interest only loan, your minimum required monthly payment is calculated monthly so any reduction to principal will lower your minimum monthly payment.

That said, either loan if at the same rate of interest and if you make the same monthly payment each month....the loan balance would be nearly identical in 10 years. So you don't gain in amortizing the loan but you don't lose either. It just gives you greater flexibility month-to-month.

that's my .02c worth.

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