Q: I'm in grad school, and although typically broke, have saved toward buying a small home. I figure I should get into a place before home prices and rates go up. Should I take out a fixed-rate mortgage, or should I go for a hybrid ARM offering 5 years fixed at an even lower rate? I'll be in school for another three years, but will likely move after graduating.
A: You may do better with the ARM loan of you don't plan to move. Rates are about 1% lower than comparable fixed rates these days; use a loan calculator and see how much you'd save over the next three to five years. Another route you should consider. especially if you don't have a large down payment, is an FHA fixed loan. Because these loans are assumable, fixing in low current mortgage rates could help you sell the home more easily and get a better price if rates have increased. Compare mortgage quotes for both types of mortgages and pay close attention to the annual percentage rates (APR); this is the cost of finance charges for each loan expressed as an annual percentage of the loan amount. "Junk" fees and closing costs add to the cost of a mortgage, regardless of advertised rates.
Q: What in blazes is a prepayment penalty? I'm getting ready to retire, and want to pay off my mortgage early, but my other half says I'd better see if our mortgage has a pre-payment penalty. Why would the mortgage company want to charge me extra for paying off my loan early?
A: Check your mortgage documents (deed of trust or mortgage) to see if your loan contains a prepayment penalty. FHA and VA loans don't have prepayment penalties. Prepayment penalties are intended to discourage refinancing before a low adjustable mortgage rate increases to a higher rate. Contact your mortgage servicing company; it can tell you if your loan has a prepayment penalty.