All financial matters have become more complexas the number of options available toconsumers has increased steadily over thepast few years. You have more investment options,more credit card options, more insurance options,and many more home financing options. For example,just 25 years ago, you had less than a dozenchoices when you were financing a home. Today,there are more than 200 alternatives. This creates adouble-edged sword for consumers. You have theability to highly customize your financing to suit yourspecific needs, but the sheer number of choices makesit difficult to make a decision. To zero in on your bestchoice, consider the following three questions:
•How long do you intend to own the property?It often makes sense to align your mortgage withthe length of time you intend to stay in your home.For example, if you're buying a starter home, andyou plan to buy a bigger home in 3 to 5 years, yourbest choice may be a 5-year adjustable-rate mortgage(ARM). These mortgages provide a lower fixed interestrate for 5 years and then convert automatically toan adjustable rate that might be higher or lowerdepending on the level of interest rates at the end ofthe 5-year term. If you plan to stay in your home forever,consider either a 15-or 30-year fixed mortgage.The 30-year loan will have a slightly higher interestrate but lower payments.
•Where do I think interest rates are headed?Making the decision process more confusing is thecurrent flux of interest rates. Over the past 2 yearsthe Federal Reserve has raised interest rates 17 times.Only at one of the past meetings did the Fed halt thesteady increases. Is this the end of rising rates? Willrates move lower over the coming months or years?Many people believe we are near the top of interestrates. If you believe that interest rates will be lower inthe future, you should consider a low closing cost,interest-only mortgage or ARM, and plan to refinanceonce interest rates go back down. If you believethat interest rates will move higher or stay the same,consider a fixed-rate mortgage as discussed above.
•What payments will my budget allow? Manypeople are attracted to the new interest-only mortgageloan because it will allow them to qualify to purchasea bigger home. However, this is usually not a soundchoice unless you are certain that you will have asteadily rising income that will allow you to beginmaking principal payments in the near future.
One of the biggest mistakes people makeis using home mortgage financing to fund consumerpurchases, such as a car, vacation, or other personalexpenses. Home borrowing should be reserved forbuying a residence or making home improvements.
Stewart H.Welch III, CFP®, AEP, is the founder of the Welch Group,LLC, which specializes in providing fee-only wealth managementservices to affluent retirees and health care professionals throughoutthe United States. He is the coauthor of J.K. Lasser's New Rulesfor Estate and Tax Planning (Wiley; 2005). He welcomes questionsor comments at 800-709-7100 or visit www.welchgroup.com. This article wasreprinted with permission from the Birmingham Post-Herald.