For example, a 7/1 ARM is a hybrid loan where the initial rate is fixed for seven years before becoming adjustable annually.
Springs went with an FHA loan because it offered a down payment assistance program that paid 2% to 3%, and the seller paid a percentage as well. “I ended up with closing costs of only $1,684,” she says. “However, since these are not conventional loans, in which a lender looks closely at your credit, they looked at my debt-to-income ratio. I was required to save about six months’ mortgage in order to get approved for the loan.”
So how do you decide what’s best for you? “It really boils down to how long you think you will be in the home or how long you will have this loan,” says McBride. If you’re buying a starter home, for example, and your family is growing, it’s likely that you’re not going to live there for very long, so you’re a perfect candidate for a hybrid mortgage. “The advantage is if your timetable pans out, you’ll never face the risk of that adjustable. In the meantime, you’re getting a fixed rate that is lower than a traditional fixed-rate mortgage.” For a more detailed description of loan options and the pros and cons of each, see sidebar, “What Type of Mortgage Is Best?”
COMPARING RATES AND FEES
After you determine the type of loan product you want, consider doing background research on lenders. It is important to see what kind of customer service record a particular lender has, so obtain a Reliability Report from the Better Business Bureau at www.bbbonline.com.To check out a lenders financials, J.D. Power & Associates (www.jdpower.com)offers Power Circle Ratings based on the opi
nions of consumers who have used the product.
According to the Federal Reserve, to get the best deal, you have to compare the same loan amount, loan term, and type of loan against different lenders. You can download a Mortgage Shopping Worksheet at (www.federalreserve.gov/pubs/mortgage/mortb_1.htm) to compare terms, fees, and rates. In it, you’ll find information such as the type of mortgage, minimum down payment required, loan terms, and interest rate.
Once you’ve decided on the product and are shopping among lenders, examine the fees involved for the closing. “When you’re shopping for a mortgage, don’t compare loan offers just on the basis of the interest rate or monthly payment,” says McBride, “you have to consider the interest rate and also the fees you will incur. You have to look at the annual percentage rate because this reflects the total cost of the loan, the interest rate, as well as any fees and points you will have to pay.”
In addition, ask each lender or mortgage broker for the current mortgage interest rates and whether those rates are the lowest for that day or week. Ask whether the rates are fixed or adjustable. If your rate is adjustable, ask how it will vary and how the rate is calculated. To find out current interest rates, check the local newspaper or www.bankrate.com.