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Mortgages: Frequently Asked Questions
A mortgage is a long-term commitment, so it pays to understand the terms before you choose one. Here are answers to common questions.
What is the difference between a fixed-rate and an adjustable-rate mortgage?
A fixed-rate loan keeps the same interest rate for its entire term, so your principal and interest payment never changes. An adjustable-rate mortgage (ARM) starts with a rate that is fixed for an initial period and then resets periodically based on a market index. ARMs can start lower but carry the risk of higher payments later. Ask what the caps are on how much the rate can rise.
How does the loan term affect my costs?
A shorter term, such as 15 years, means higher monthly payments but far less total interest. A longer term lowers the payment but costs more over the life of the loan. Choose the shortest term you can afford without straining your cash flow.
What are points?
Points are fees paid up front to reduce your interest rate. They make sense mainly if you will keep the loan long enough for the monthly savings to exceed the up-front cost. Tax treatment of points can vary depending on the circumstances, so ask us before you decide.
What is private mortgage insurance?
Lenders often require private mortgage insurance when your down payment is small. It protects the lender, not you, and adds to your monthly cost. In many cases it can be removed once you have built enough equity, so ask your lender what the rules are.
Should I refinance?
Refinancing replaces your current loan with a new one. It may make sense if rates have dropped meaningfully, if you want to shorten the term, or if you need to switch from an adjustable to a fixed rate. Weigh the closing costs against the savings and how long you expect to stay in the home.
Can I pay my mortgage off early?
Many loans allow extra principal payments, which reduce interest and shorten the loan. Check for prepayment penalties first. Also compare the benefit of prepaying against other uses for the money, such as retirement contributions or paying down higher-interest debt.
If you are comparing loan offers or considering a refinance, reach out to us and we can review the tax and cash-flow effects with you.
This article is general information, not tax, legal or investment advice for your specific situation.