This page is part of the Homebuyer's Fair
The purpose of this exhibit is to give you some ideas to consider in selecting a mortgage. The approach taken here is simplistic. It cannot possibly address all of the issues in your particular situation. Use it to start your thought process, but do not rely on this information alone to make a final decision.
For a more quantitative answer, see The Intelligent Mortgage Agent.
The approach is based on your answers to three questions:
1. Does your job/career lead to an especially high degree of mobility?
Answer this question "yes" only if you are very likely to change locations as a result of your job within the next four years. Examples would be military personnel or professors on short-term contracts.
2. Are you in the "growing family" stage?
Answer this question "yes" only if you are at a stage where you need as much house as you can afford. This is called the "growing family" stage because many young families that are having children find themselves in this position. Families that are beyond the "growing family" stage ought to focus less on qualifying for the biggest house possible and more on building up equity and other forms of saving.
3. Is your income trend especially favorable?
Many people have seen their incomes go up at the rate of inflation, say 3 to 4 percent per year over the past few years. Looking ahead, do you have reason to expect your income to grow at a much faster rate (8 to 10 percent per year) for the next two years? If so, answer "yes" to this question.
Here is how you might use your answers to the three questions above to help guide you to consider different mortgage products.
Mortgage Recommendation Table
Answers to Questions mortgage products to consider
Job mobile growing family income trend
yes yes yes 1-year ARM
yes yes no 1-year ARM, 3-year ARM
yes no yes 1-year ARM, 5-year balloon
yes no no 3-year ARM, 5-year balloon
no yes yes 1-year ARM
no yes no 3-year ARM, 7-year balloon
no no yes 10-year fixed-rate
no no no 10-year fixed rate
Homebuyers with highly mobile jobs should select short-term mortgage products in order to take advantage of low interest rates. Growing families will tend to need short-term mortgages to help hold down monthly payments, but without a favorable income trend a 1-year ARM could be too risky. Homebuyers without highly mobile jobs and who are at the stage when they should be building equity might benefit from the lower risk of a fixed-rate mortgage, but they should be looking to pay off their loans in 10 years.
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