Green hills asks:
I am wondering if you can give your opinion on the best loan types for first time home buyers. Is an adjustable rate better over time than a fixed rate? And what is the difference between the loan interest rate and the APR? We’ve done a bunch of reading and really, have just confused ourselves more.
There are very few instances in which you would want an adjustable rate rather than a fixed rate. (Leightpf is one of the rare exceptions.) The very fact you are asking this question means that the best loan for you is a 20% down fixed interest rate, either for 15 years or for 30 years. Whether you choose 15 vs. 30 will depend on the difference in the interest rates and what you would do if one of you had a job-loss or other emergency. (30 year loans are safer– you can pre-pay them as if they were 15 year loans and then when an emergency hits, lower your payments, but a 15 year loan can save a lot of money. You have to look at the numbers to see which is best for your situation.)
In general for loans, the APR includes compounding. Different loans compound at different times. APY doesn’t take into account compounding. For mortgages, APR also includes a bunch of junk that mortgages try to confuse you with like “points” and “rolling fees into the principal” (a quick google search says it doesn’t include the paperwork fees, so you will compare those separately). The APY is jiggered so that they can make it seem like they’re offering you a low rate but then they hit you with a bunch of upfront fees. You should be comparing APR and ignoring APY when you’re trying to decide between mortgage lenders. Get the APR in writing.
So: quick bottom line: Use APR. Save at least 20% for a downpayment. Get a fixed rate mortgage for either 15 or 30 years. Don’t buy more house than you can afford!
Ok, now for unusual situations that do not apply to you. If you have a lot of cash and are in no danger of ever defaulting on your mortgage or being unable to make your monthly payments, then you may be interested in an ARM if 1. The difference in interest rates between the ARM and the fixed rate is high and 2. There’s no way that you’re going to end up with the rate being reset at the end of the ARM into something that you can’t pay back. So, if you’re flush enough that you can definitely pay back the mortgage before the rate resets, or the limitations on how high the rate resets that make it so it can’t reset to something you can’t afford, then you may want to consider an ARM. The argument that people usually make when choosing an ARM is that they’re going to resell the house before the end of the term anyway so it doesn’t matter what the rate resets to– but you have to be sure that you won’t need to short-sell that house or keep it on the market longer than expected (another reason to have cash on hand to make up the difference if the market drops) and that your plans aren’t going to change. So be careful.