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Mortgages : A How To Guide

What kind of mortgage?

Competition among lenders has given consumers a broad array of choices, but it hasn't made comparison-shopping easy. Mortgages now come in nearly every conceivable combination of interest rate, duration, and fee structure.

Which loan makes the most sense depends on how long you plan to remain in the home and the monthly payment you can afford. If you live in a city where co-operative apartments are common, you will probably have fewer options.

Lenders consider not just the credit-worthiness of the co-op buyer, but the underlying financial health of the corporation that issues the building's shares. The conventional 30-year fixed-rate mortgage has been the perennial favorite of borrowers, and it's more popular than ever as both buyers and refinancers scramble to lock in today's low rates. It offers homeowners the peace of mind of knowing that even if economic conditions cause interest rates to rise sharply, their payments will remain steady.

But in these footloose days, relatively few people remain rooted in a home for a lifetime. If you plan to relocate within a few years, you may find an adjustable-rate mortgage (ARM) less costly at least at first. The most common ARMs recalibrate interest once a year, based on an index of benchmark Government bond rates.

ARMs made sense for many borrowers in the early 1980s, when interest rates were high and volatile. Their lower initial rates were often the only way that many people could afford to buy a home. But lately the spread between conventional and ARM has narrowed to 2 points or less, too small to be worth the risk of paying more next year unless it's the only way your income qualifies you for a mortgage.

One breed of ARMs is worth considering. These maintain a fixed interest rate for a specified number of years typically 3, 5, 7, or 10 and then adjust annually for the balance of the loan. Multiyear ARMs may be well suited for consumers planning to relocate within or soon after the mortgage's initial period. In fact, the average mortgage is paid off in just seven years because the borrower moves to a different home or refinances the loan in that time.

Multiyear ARMs permit borrowers to lock in, at least for a few years, a lower initial interest rate than they could get for a fixed-rate mortgage. And, because the monthly payment on an ARM is lower, banks are able to qualify borrowers with a smaller income.

How to lower your costs

While the interest rate you get will be the biggest factor determining the ultimate cost of your mortgage, lenders have other ways of upping your costs. You can save thousands of dollars and much frustration by getting prequalified and preapproved for a mortgage and by minimizing transaction fees. Here's where to look for your best opportunities to save:


Lenders expect borrowers to spend no more than 28 percent of their pretax income on total housing costs, including mortgage payments, insurance, and taxes. Housing costs plus all other long-term debt, such as car payments and student loans, should not exceed 36 percent of your gross income.

Ask your broker or a potential lender whether you would qualify for a loan before you begin shopping. It can save you time by focusing your attention on properties that realistically fit your budget.


As you get closer to selecting the property you want, consider lining up a bank that will give you its provisional agreement to grant you a loan. Preapproval can boost your bargain


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