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Selecting a mortgage term

Posted by Cheryl Costa  April 27, 2012 09:52 AM

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As you probably know, interest rates for mortgages are at historic lows. These days, if you look around, you can likely find a no-points, no-closing cost, 30 year fixed rate mortgage for 4 percent or less. There is no question that that is a fantastic rate, but before you automatically sign up for a 30 year term on your mortgage, be sure to ask yourself how long you really expect to be in your home. If you know for a fact that you will be moving to another city in five years, or that you will be selling your home in four years when your children graduate from high school, a loan with an adjustable term may be just the thing.

These days, more and more people are opting for 30 year mortgages where the initial interest rate is fixed for 5 or 7 years and then is adjustable after that introductory period expires. The big draw is that the rates for these mortgages are often 3 percent or less. If you have a mortgage of $400,000, a 3 percent rate will save you $225 per month versus a 4 percent rate -- that is a nice monthly savings.

Of course, the trick is that if your plans change, and you end up not wanting or having to move, your super low rate in 2012 may jump dramatically in 2017 or 2019 when your rate re-sets. (The first year adjustment may only be 2 percent higher but the rate could rise more in subsequent years -- be sure to ask your lender what the maximum per year interest rate increase is and what the maximum total increase is). In summary, it is important to carefully consider how "sure" you are that you will be moving sooner rather than later because locking in a fixed rate of 4 percent for 30 years is a very good deal and you would only want to go for the lower rate if there was little to no chance that you would be staying in your home after the introductory rate period expires.

This blog is not written or edited by Boston.com or the Boston Globe.
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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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