You should consult with financial planning experts and determined your financial needs as well as your long-range goals regarding your custom home and lifestyle choices, this having to be done before considering which mortgage program is right for you.
When dealing with financing, your needs are far more important than your wants. The loan officer is responsible for bringing you her experience, knowledge, understanding, and education so that you can make intelligent, educated decisions about what is in your own best financial interest. Choose your loan provider carefully and do your own homework. A loan officer that tells you only what you want to hear — not what you need to hear — could very well cost you tens of thousands of dollars over the life of your loan.
Types of Mortgage Programs
There are a few mortgage program choices available in the process, such as the home equity lines of credit (HELOCs), offered by many banks as a second mortgage program, that is, as a separate mortgage program in addition to your primary home mortgage. HELOCs are effectively giant credit cards secured (guaranteed) by your home. Some people feel that a HELOC is particularly advantageous because you can pay back the equity and you only pay interest on what you use.
Most HELOCs are on a variable rate with few restrictions for only a ten-year period. If you take the money, you’ll most likely have to refinance your line of credit at some point in the future. If you think you need the cash long term, our advice is to take it while the interest rates are low and lock in your rate by folding it into your first mortgage program.
An adjustable rate mortgage (ARM) is a loan with an interest rate that changes on a fixed schedule. The benefit to this particular kind of mortgage program is that it generally offers a less expensive payment than other loan types — at least initially. When considering ARMs as an option, the time length you plan to have your new loan as well as the current interest rate are the factors most important in choosing the right mortgage program.
The interest-only loan is a relatively recent mortgage program offering. Normally, mortgages are amortized, meaning that payments are spread out equally into the future to pay off the mortgage over time. The typical 30-year fixed mortgage, for example, is amortized to pay off automatically in 30 years. Even though your payments stay level during the course of the loan, your payment amount going toward your principal becomes larger, reducing your interest and paying off the balance. For the first few years, most of your payment goes to interest.
Yield of the Mortgage Program
Mortgage programs are all about yield. A yield is a calculated number that takes into account both the fees that you pay and the interest rate that you get. Banks offer zero-cost loans to attract business, but raise the rate to cover their expenses.
Before making a decision, compare which offering is best for you. Ask your loan officer to give you the interest rate with payment as well as the total points and fees for each option. Make sure you ask for all the available mortgage program options. Next, pick any two options, and take the difference in total points and fees and divide it by the monthly payment difference. Doing so tells you how long it will take to make up the difference. Sometimes, the ratio of points to rate favor you instead of the bank and they can change daily. Because many of the closing costs are the same regardless of the size of your loan, a smaller loan can require a higher interest rate in order to cover the costs. You may find the difference on a long-term loan can save you thousands of dollars. It pays to ask your loan officer for all the mortgage program options and run the numbers.