Top 10 Tips For Buying Real Estate - #5

Tip #5: Fixed vs. Adjustable Rate Mortgages

Which type of loan fits your particular needs? If this will be your first home or a "transitional home" -- one you plan to own for a short time, an ARM may be the best type of loan. If it's going to be your dream home or one you plan to raise a family in, then you may want the stability of a fixed rate mortgage.

If you do choose an ARM, the index should be based on the Cost of Funds Index if rates are increasing, and Treasury Bills if they are decreasing. The COFI's are less volatile over time than T-Bills; make sure the teaser rate is understood and what the real rate would be. Personally, I would advise to avoid ARMs whenever possible. From experience many buyers end up staying longer than initially anticipated and get caught in the ARM scare.. In a soft market this can be troublesome when refinancing options aren't available. In today's market for example, where seller's aren't able to sell for what they had hoped, many are turning their first homes into investments. Sometimes this can work out well especially in the condo market. However, with fluctuating interest it can cut into potential profits. A locked in long term rate can prove to be better than an ARM.

Whichever loan you choose; make sure that you scrutinize all the closing costs. Typically in Hoboken, closing costs can be about 2 points of the purchase price. This can vary however depending on taxes, capital contribution, fees and a number of other factors. If you are required to have a mortgage escrow account and private mortgage insurance, make sure you understand the terms and cancellation procedures (your Real Estate Agent has publications to assist you). Also, make sure there are no prepayment penalties so that you can utilize an accelerated mortgage plan. A good mortgage reduction plan can save you tens of thousands in interest costs, and shorten your loan term, with only small extra principal payments. If you experience negative changes in your job, health, or marital status, you can revert to the standard payments in your mortgage contract.

Always look for referrals or recommendations of mortgage brokers/lenders that your friends or professionals have used. It doesn't hurt to share a Good Faith Estimate with your Real Estate Agent for some advice. I've been able to pick up excessive fees in some cases for my buyers and have referred them from their 'family' friend to a professional I trust.

Till tomorrow's tip!!