FINANCIAL PLANNING FOR HOME BUYERS

The first thing most homebuyers do when they decide to buy a home is to start looking at homes.

If they have an inexperienced REALTOR® showing them homes, that agent may decide to show them homes without attempting to qualify them to determine the price range at which they should be shopping.

While you are eventually going to do that, it would be best to find out if you can qualify for a new loan first. If so, how much is the lender willing to loan you? What types of loans are available? Here are some of the more popular loans available to you.

Fixed Rate Loans. The monthly payments for a fixed rate loan remain the same for the life of the loan.

You should consider a fixed rate loan when: Interest rates are low. You’re on a fixed income. You want stable monthly payments. You plan to stay in the home for more than 10 years.

Adjustable Rate Mortgage (ARM). An adjustable rate mortgage typically begins with an interest rate that is 2 to 3 percent below the comparable fixed rate mortgage. However, the interest rate for an ARM can be adjusted, either up or down, on a periodic basis, usually annually. The adjustment amount is determined by the index associated with that particular type ARM, such as one-year Treasury Bills and others.

You are protected from exorbitant adjustments by caps. Generally, a limit of a 2/6 cap applies which means that the interest rate can be adjusted up or down no more than 2% in one year and 6% over the life of the loan. That means that if your initial interest rate is 6%, the highest it could be adjusted is 8% the first year. The highest rate possible for that ARM would be 12%. There are many different types of ARMs.

You should consider an ARM when: Fixed rates are high. You plan to keep this loan for a short period. You plan to keep the home for a short period.

Convertible Loans. Many buyers want the best of both worlds when it comes to mortgages. They want the lower interest rate that they can get with the ARM but they want the stability and certainty of a fixed rate loan. The convertible loan accomplishes that by providing you with a fixed, lower interest rate for 3, 5 or 7 years. At the end of that initial period, the interest rate floats to the current rate or the loan must be paid off or renegotiated.

You should consider a convertible loan when: You just don’t like ARMs. You expect a significant increase in your income in the next few years. You are comfortable with the options you will face at the end of the fixed rate period.