West Chester and Liberty Township Homebuyers: Be Sure to Shop Around for Mortgages!

 

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Last weekend I was chatting with one of my West Chester neighbors when he told me that a mortgage broker promised him a 3.25% interest rate if he refinanced into a new 30-year mortgage. I was baffled! As the top real estate agents in West Chester and Liberty Township, OH my office is always monitoring interest rates. The rate he was quoted was simply too low. Something didn’t sit right with me.

As it turns out, he was being coaxed into a 15-year ARM – not a 30-year fixed rate mortgage like my neighbor had assumed. WHOOPS. Big difference!

In my experience, people looking to buy West Chester and Liberty Township homes for sale often spend more time posting pictures on social media of their new home than they do shopping for a loan! This is super dangerous, and could cost you thousands of dollars over the life of your loan.

So, without further ado, here’s a rundown about mortgages to guide West Chester and Liberty Township homebuyers as they set out on their home search:

Fixed Rate Mortgage

The interest rate is fixed for some period of time – from 5 years up to 50 years. The most common types are 15- and 30-year fixed rates (the “conventional” loan). If you use a fixed-rate mortgage to buy your West Chester or Liberty Township house for sale, you have the security of knowing how much you're going to pay every month, year in and year out. If rates go up, you won't pay more. If rates drop significantly, you can refinance into another lower-cost, fixed rate loan. Most people will opt for the fixed-rate mortgage if they plan to stay in their property for more than five years.

Adjustable-Rate Mortgage

Unlike a fixed rate mortgage, the interest rate on an ARM can fluctuate from year to year. Interest rates for ARMs are usually lower because they come with higher risk over the long-term. Many lenders will offer a 5-year ARM in which the interest rate is fixed for the first five years of the loan and then fluctuates thereafter. If you aren’t planning to stay in the same West Chester or Liberty Township home for more than 5 years, an ARM could be a great option. You lock in a lower interest rate now, and if the rates fluctuate down the road (beyond the initial five years), it won’t matter to you because you will have sold the property.

Interest-only ARM  

This type of loan allows West Chester and Liberty Township borrowers to pay interest only for a period of time before paying principal and interest. This loan isn’t common for the purchase of a new home, but is often used as a second loan—like a home equity line of credit—after a person has owned a home for a while. On the rare occasion a person is able to secure an interest-only ARM for the primary loan on the purchase of a new home, beware that the devil is in the details. If you are not able to pay interest and principal at the same time, it will be difficult to pay down the mortgage and build equity in your West Chester or Liberty Township home.

One-year Treasury ARM

This type of ARM has a fixed interest rate for one year only before it become adjustable. The new rate is calculated by the U.S. Treasury average index plus the loan margin. When rates go down, you can benefit with 1-year Treasury mortgage because rates are lower than other fixed-price mortgages and ARMs. If you’re going to pursue this option, be sure to ask what the margin, life cap, and periodic payment caps of your ARM will be. This usually sets the maximum amount your loan can fluctuate by (a/k/a increase) during the lifetime of the loan.

Convertible ARM

This mortgage allows a West Chester or Liberty Township homeowner to convert their ARM into a fixed-rate mortgage after some period of time. Convertible ARMs are marketed to people as a way to avoid rising interest rates. Few people go this route; instead, most refinance into a conventional loan. The only real benefit is the convertible ARM allows people to save the up-front costs of refinancing, but the bank might tack on fees to switch the ARM to a fixed-rate mortgage so it usually ends up being a wash.

Balloon Mortgage

A balloon mortgage is when a person pays a very low interest rate and small amount toward principle every month, but after a certain period of time (typically, 10 years), a “balloon” payment will become due equal to the principle balance of the loan that had not yet amortized. For instance, if you have a loan for $400,000 and through principle and interest payments over ten years you pay down the loan to $300,000, at the time the balloon payment is due you’d owe a lump sum of $300,000.

Few people use these loans to buy West Chester or Liberty Township homes nowadays, but they can make sense for someone who has a low salary but high bonus potential, like someone who works off sales commissions.

Hybrid Mortgages

There are many types of hybrid mortgages, including: Option ARM mortgages, Combo Loans, and Mortgage Buy Downs. An Option ARM is a complicated mortgage type, and the interest rate fluctuates periodically. Borrowers can choose from a variety of payment options and index rates. A Combo Loan is when a person has both a first and a second mortgage. The first mortgage is usually for 80% of the principle, and the second loan can be used for home renovations/repairs or to pay down additional principle in order to avoid paying PMI. The first mortgage will always supersede the second mortgage, so if you default, the holder of the second mortgage gets repaid last. Finally, a Mortgage Buy Down is when borrowers pay an upfront fee (usually equivalent to 1% of the purchase price) to lower their interest rate by a set amount making the monthly payments on their West Chester or Liberty Township home lower each month.

So if you’re out there shopping for real estate for sale in West Chester or Liberty Township, OH – how do you decide which loan is right for you?

Look at all of the deals, the fees associated with taking any one of these mortgages out, and the terms of the rates that you’re being offered.

And always, ALWAYS be sure to check in with a few different lenders to compare your options! We work with a number of lenders here in the West Chester and Liberty Township area that we’d be happy to put you in touch with if you’re considering buying a home for sale. Shop around – you’ll be glad you did!