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I'm Buying a House, Should I Take a Loan That Is Fixed for Only Two Years?

April 17, 2012 | Comments: 0 | Views: 125

If you are going to purchase a home or refinancing an existing one there are two loan types that are the bread and butter of most lenders; the thirty year fixed, and the 2/28 arm. The thirty year fixed is self-explanatory. The 2/28 is a loan amortized over thirty years, but is only fixed for two then becomes an adjustable loan. So which is better?

Most borrowers prefer the thirty year fixed loan but there are circumstances where you might prefer a loan that is only fixed for two years. If you've got some dings on your credit report and no longer qualify for prime, you're going to find out that accepting the 2/28 is going to have a rate that is one to one and a half percent lower than a thirty year fixed rate loan. If you cannot qualify for a fixed rate loan because your debt to income ratio is too low than you're going to want to take the 2/28, sometimes called a two year arm. That gives you two years to get your credit cleaned up, then you can refinance into a fixed rate loan before yours adjusts to a new higher rate. That is probably the most common reason someone will opt to take a two year arm.

If you are planning on only staying in your home for two or three years you might want to go with a loan that is fixed for the time you will have the loan. Most lenders will offer a 2/28, a 3/27 or what is called a 5/1 arm. Those usually give you a lower rate than a fixed rate loan enabling you to save the maximum amount you're able to on your mortgage. Just make sure the loan you take doesn't have a prepay penalty that goes on longer than you plan on staying in the loan. So if you are moving in two years don't take a 2/28 with a three year prepay. That loan right there is the mainstay for many lenders. Just make sure no one sells you that deal. Keep in mind most prepayment penalties are the equivalent of six months interest.

So there you have it. If your circumstances warrant it, go ahead and take the 2 year arm or one of the other adjustable loans. If you can qualify for prime you might just want to lock in a fixed rate loan and be done with it, knowing you won't need to refinance later. Keep in mind, most lenders will also give you a better rate, sometimes up to a half a percent better if you take a fifteen year fixed instead of a thirty year one. Good luck and happy borrowing.

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Source: EzineArticles
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