The Pieces
of Your Mortgage Puzzle
Twenty-five years ago, most home buyers had just one
option for borrowing money: a 30-year, fixed-rate loan.* This remains
a popular mortgage in today's market as well. But now, one size does not
fit all. Today you can select a mortgage tailored to your lifestyle, with
fixed or adjustable interest rates, as well as terms of one year to 30+
years. Which mortgage you select depends on your current situation. Keep
in mind that as your life changes, your idea of the "right" mortgage may
need to change as well.
Fixed-Rate Loans
A 30-year fixed mortgage means the loan is at a fixed interest rate for
30 years. This is a popular mortgage because it offers stability in equal
monthly payments. The 30-year fixed mortgage would be a good choice if
you're a first-time buyer needing to keep payments low. A 15-year fixed
mortgage shortens the length of the loan, saving you thousands in interest
payments. This type of loan is best if you're at your peak earning potential
and can afford higher monthly payments, or if you plan on staying in the
house 20 years or so.
Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) are just that-adjustable. The loan starts
out with a lower interest rate, but then adjusts up or down periodically,
protected by a yearly cap. This loan varies in length from one year to
30 years. An ARM can be converted into a fixed-rate mortgage, but usually
for a fee and a higher rate. An ARM works best for those who plan on staying
in the house just one to three years. It's also good for those who need
the lower rate at first, but know they can handle any possible increase
in monthly payments later.
The Best of Both
Hybrid loans combine the features of fixed-rate and adjustable-rate mortgages.
The initial interest rate for a hybrid loan holds steady for three to
10 years of the loan, and then adjusts biannually or annually for the
life of the loan. Common loan terms are 5/25, 7/23 and 10/1. A 5/25 loan
is fixed about one percent below the 30-year fixed rate for the first
five years. At the five year mark, a one-time adjustment brings the rate
to one percentage point above the 30-year fixed rate.** A 7/23 uses the
same idea, but you'll lock in for two extra years at a rate one-quarter
higher than the 5/25 loan.** The 10/1 is fixed for the first 10 years,
then converts to a one-year ARM and adjusts annually. The 10/1 rate is
typically one-half to three-quarters of a point higher than the 7/23.***
These types of mortgages offer flexibility to those who can predict a
job transfer or will be earning significantly more in a few years.
The Completed Picture
A mortgage will likely be the largest percentage of your monthly budget,
so you'll want to choose wisely. Keep in mind your monthly budget and
long-term financial goals. Our experienced loan department can help you
piece together your mortgage puzzle.
*Source: Money, October 1997 **Source: Bottom Line/Personal,
July 15, 1997 ***Source: KiplingerOs Personal Finance Magazine, May 1994.
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