What Can I Afford?

The purchase of a home is the most expensive financial transaction most people will make in their life. It is therefore important to do your homework and be sure you are getting the best deal possible and one you can comfortably live with for the life of the mortgage.

There are a number of mortgage options available including the following:

Fixed Rate Mortgage

This is the type of home financing that offers the security of a fixed payment for the life of your mortgage. For those who plan to live in their home for at least ten years and prefer a mortgage payment that is the same each month, this may be the best choice.

Fixed rate terms of 15 and 30 years are the most popular. A mortgage term of 15 years will allow you to pay off your mortgage more quickly with less interest over the term of the loan. The 30 year mortgage term offers lower monthly payments but more interest is paid over the length of the loan and a large percentage of the mortgage payments are used for paying off interest for a number of years.

Another option is making biweekly mortgage payments instead of monthly payments. Consequently, the mortgage is paid off sooner because – since there are 26 two week periods per year – thirteen payments will be made each year instead of twelve.

Merrill Lynch offers:

• 10, 15, 20, 25 and 30 year terms and now is offering a new 40-year Fixed Rate mortgage for loans up to $417,000.
• Fixed amortized payments for the life of the loan.
• No prepayment penalty.

Adjustable Rate Mortgage (ARM)

Adjustable Rate Mortgage terms vary from bank to bank. An Adjustable Rate Mortgage typically offers an initial rate that is lower than a Fixed Rate Mortgage. For example, some banks offer ARMs of 1/1, 3/1, 5/1, 7/1 and 10/1. What this means is that the first year, three, five, seven or ten years have an initial low rate and then the rate is adjusted each year for the remainder of the mortgage life based on an index. If you are considering an ARM, be sure to obtain a clarification from your lender of how often your rate will be adjusted.

It is also important to have an ARM with a “cap” on the rate of interest. These caps will limit how much your rate can go up whenever an adjustment is made and also how much it can go up over the life of your loan.

An ARM should be considered if you:

• Plan to move within seven years of buying your home.
• Are reasonably sure that your income will increase over time.
• Want to buy a more expensive home than you can qualify for at a fixed rate.

The more common indices used are United States Treasury Bills, the London Interbank Offered Rate (LIBOR) and California 's 11 th District Cost of Funds. In addition, each lender adds their own preset margin to that index. As a result, your payments may go up or down depending upon the overall economy and the indices.