Home Buyers Guide from Tammy Mitchell Hines & Co. Workbook for Home Buyers | Page 37

This amount is placed in an escrow account from which your lender then pays your tax and insurance bills as they come due. When shopping for a loan, it is important to ask the lender if the monthly payment you are being quoted is PI or PITI. What are the respective advantages of 15-year and 30-year terms? As you’d expect, a 15-year monthly mortgage means higher monthly payments than an equivalent 30-year loan . . . but not as much higher as you think. At the same rate of interest, payments on the 15-year mortgage are roughly 20-25% higher than a loan that takes twice as long to pay off. But one of the benefits of choosing a 15-year mortgage is that you can generally get a lower interest rate for an otherwise similar loan. Another advantage is faster equity build-up because a larger portion of your early payments are going to pay off principal. This makes the 15-year mortgage an ideal alternative for couples approaching retirement or anyone else interested in owning their home free and clear as quickly as possible. The 30-year fixed mortgage remains the standard mortgage with an array of valuable benefits designed especially for buyers who expect to stay in their home for a long time. Because the borrower pays more interest than principal for the first 23 years, the tax deduction is substantial. And as inflation causes income and living expenses to increase, your unchanging monthly mortgage payments account for a relatively smaller portion of income as the years go by. Do Adjustable Rate Mortgages offer any protection against rising rates? YES, ARMs and other variable rate or payment www.CallTammy.com * 618-281-3959 plans offer lower-than-market interest rates initially, but because they are tied to the interest rates of U.S. Treasury Bills or other indexes, interest rates may rise later in the loan term. However, many such loans offer built-in safeguards designed to minimize the effect of any rapid escalation in interest rates. One such safeguard is the rate cap. Many ARMs include provisions for the maximum amount your rate can rise, both annually and over the life of the loan. For example, if your initial rate is 8%, the loan may include 1% annual and 5% lifetime caps . . . which means that even if rates rise dramatically, you’ll pay no more than 9% next year, 10% the following year, and so on until a maximum rate of 13% is reached. ARMs may also allow your rate to decrease when the index to which it is tied goes down. As you might expect, decreases are usually capped as well. A second protective device included in some ARMs is the payment cap. Under this provision, your monthly payments may rise by only a set dollar amount. The potential disadvantage of this type of cap is that it can slow or even reverse your equity build-up. If rates rise dramatically, you could actually wind up owing more principal at the end of the year than you did at the beginning. Of course, ARM holders can also consider refinancing to a fixed-rate loan after a few years. Some ARMs even include a provision for converting to a fixed rate after a set period of time. How can I find out what my property tax bill will be? Usually the total amount of the previous year’s property taxes is included on the listing information sheet for the home you’re interested in. Remember, tax rates change from year to year, so the previous year’s tax bill should be considered simply as a ballpark figure of what you would pay. Q&A Loans continued on next page * [email protected]