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Deciding How You'll Pay for a Home

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Checking Out Your Profile

Money Morsel

Today's adjustable mortgages don't offer the really big initial savings that they did in the past. Even the Mover might be better off locking in a low long-term rate through a fixed mortgage.

Adding It Up

Fannie Mae is a security issued by the Federal National Mortgage Association, which is backed by insured and conventional mortgages. Monthly returns to holders of Fannie Maes consist of interest and principals payments by homeowners on their mortgages.

The Pennsylvania Institute of Certified Public Accountants has come up with a set of mortgage guidelines, based on a borrower's profile. Read it over and see where you think you fit in, and what type of mortgage may be best for you.

  • The Lifer. For borrowers who will stay in their home for many years, a fixed-rate mortgage may be the best. You pay slightly more in the first year than you would with an adjustable-rate mortgage, but you lock in the low fixed rate for the long term. It may be worth paying points up front to get a lower interest rate that will save you money over the years of the loan.

  • The Mover. If there's a possibility that you may move again during the next few years, an adjustable mortgage might be best for you. You get a lower rate in the early years than with a fixed mortgage. And, because you'll be moving, you needn't worry much about the adjustable rate creeping up on you.

  • The Income Climber. If you expect to receive pay raises, pay off debts, or experience increases in income due to an inheritance or some other reason, consider a graduated payment mortgage. Monthly payments will gradually rise on a fixed schedule.

  • The Well-Heeled Buyer. If making a big mortgage payment isn't a problem, consider a mortgage for 15 or 20 years, instead of 30. You'll pay off the loan faster, and save a bundle on interest.

  • The First-Time Buyer. If you can afford the monthly payments but don't have the savings for a 10 or 20 percent down payment, look around for a mortgage that requires little or no money down. One such loan is the Flexible 97 mortgage backed by Fannie Mae. It allows a down payment with an unsecured loan from a family member, something that isn't permitted with most traditional mortgages.

These profiles can give you an idea of what type of mortgage may work the best for you. It's a good idea, though, to talk to a mortgage counselor or your accountant before making a final decision.

If you're thinking about buying a vacation home and you have built up a fair amount of equity in your primary home, you might think about getting a home equity loan.

Home Equity Loans and Lines of Credit

Money Morsel

If you're interested in an equity loan, be sure to do some comparison shopping. Lending institutions are competing fiercely with one another to sell home equity loans. Find a lender that charges a good rate, with minimal fees.

Loans based on the equity in your home generally can be obtained at lower interest rates than nonsecured loans, and the interest is normally tax-deductible.

If you need cash out of your home, you probably don't have to refinance into a new first mortgage. Consider adding a second mortgage or getting a home equity loan. Second mortgages are loans you get on top of your primary mortgage, and they're not part of the national market. Held by local lenders, the interest rates on them can vary tremendously, so be sure to shop around.

Home equity loans are generally paid back over a much shorter time period than mortgages. Review your entire loan situation with your lender, looking at whether it's best to refinance everything into one loan or to add a home equity loan to your first mortgage. The lender will be able to provide you with comparison costs and total interest paid.

Using your home as collateral for a loan puts your home at risk if you should default. You should carefully assess your borrowing needs and your ability to repay before you decide to borrow against your house.

There are two types of equity loans. The first, a fixed, lump sum amount, is known as a home equity loan. Usually taken out for a car or home improvement project, there is a fixed term to the loan. That is, the interest rate and your monthly payment will remain fixed over the life of the loan.

An equity line of credit enables you to draw against a credit line as the need arises. You can pay for the kids' braces, car repairs, or whatever. Instead of borrowing a fixed amount of money, a line of credit qualifies you for a certain amount of credit. You can borrow up to your credit limit, if needed, but you don't need to. The monthly repayment amount depends on what you've borrowed and the interest rate charged is variable. Lines of credit generally carry higher interest rates than home equity loans.

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Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


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