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Now that mortgage rates have dropped to their lowest levels since
1987 -- about 7% for one-year adjustable-rate loans and 9.3% for
30-year fixed mortgages -- you may be tempted to buy a home or
refinance the one you have. (For advice on the tax implications of
refinancing, see page 167.) Choosing the right mortgage is critical,
since the wrong move can be expensive.
Most housing analysts now recommend fixed-rate loans because the
stable payments provide peace of mind. ''Why fool around with the
uncertainty of an ARM when you can get a fixed rate in the 9%
range?'' asks Brian Chappelle, a vice president at the Mortgage
Bankers Association. Since the interest rate on most ARMs can rise by
as much as six points during the life of the loan, today's 7% ARM
could wind up becoming tomorrow's 13% worry.
One of the most attractive fixed-rate mortgages -- assuming you
expect to move within seven years -- is a new type known as a
two-step. With a two-step, your mortgage payments are reduced during
the first few years of the loan. The interest rate starts about 0.5%
below the prevailing fixed rate and stays at that level for seven
years. But then the mortgage turns sour: its rate will rise to
roughly 1.5 to two points above that of 30-year fixed loans at the
time and won't change again. GMAC Mortgage and the Bank of New York
are among the lenders dancing the two-step.
On fixed-rate loans generally, you can build equity faster and cut
your interest costs in one of two ways: through a 15- or 20-year
mortgage or through biweekly loan payments. You usually get a 0.25%
rate discount on a 15- or 20-year mortgage compared with the standard
30-year fixed loan. In addition to the rate break, accelerated
payments may cut your total interest charges by as much as 60%. Bear
in mind, though, that monthly payments are 10% to 20% higher on these
varieties than on conventional 30-year mortgages.
Biweeklies have the same rates and terms as standard fixed loans.
Instead of sending in a monthly mortgage check, however, you pay half
your monthly payment every two weeks. This way, you make the
equivalent of 13 monthly ^ payments a year and can pay off a $100,000
30-year loan within 22 years, saving $65,000 in interest.
You can also repay a standard mortgage on a biweekly schedule on
your own, as long as the loan has no prepayment penalties and your
lender approves. If you get sick or laid off at any point and can't
afford to make the extra payments, you can switch back to paying the
mortgage monthly.