Choosing A Housing Loan : Fixed, Adjustable, and Hybrid
Put it simply, the choice of housing loan type is largely depends on how long one planned to stay in the newly acquired property.
But first, let’s go through some housing loan or mortgage basics.
Housing loan basics
All mortgages are for a finite period of time, known as term (MAA has a 100-year loan). Most mortgages have a 30-year term, but other shorter options also available. Though mortgages come in many shape and size, but basically they can be broken down into 3 categories based on how the interest rate is charged.
- Fixed-rate mortgage: Interest rate charged will never be changed. The borrowers are sheltered from future interest rate fluctuation
- Adjustable-rate mortgage: Interest rate charged is subject to general economy conditions, represented by Base Lending Rate (BLR), up or down. Typically rate adjustments occur once a year. In the case of BLR remain unchanged, the yearly rate adjustment can increases the monthly payment and create a ‘shock.”
- Hybrid mortgage: A loan that offers fixed rate for the first few years before reverting to floating rates (BLR).
Here is an example for the 3 types of mortgages, as of July, 2006
Housing loan interest is heavily front loaded
In the early years on the loan, the vast majority of the payments go toward the interest. The reason is simple, the lenders figure that the owner would not actually stay in the same house for 30 years, therefore they want to cash-in to get the profit (loan interest) as much as possible, before the owner trade-up or move-on. In general, 15 years of payment for a 30-year loan only reduced the loan principle by 30%.
Choice of housing loan depends how long one intended to stay
if you plan to stay in the house for the next 5-7 years, the most sensible choice is a 3-year or more hybrid loan. Reason: Pay as little as possible and you will only hit by a bigger monthly payment (when the low fixed rate expired) for a short period of time. Currently, the initial fixed rate of a hybrid loan is between 0.5% to 1.0% lower than those Fixed and Variable loans.
Also, if you have no intention to stay long, pay as little as possible for the down payment. Though most lender prefer 20% down payment, but there are many loan packages that required down payment lesser than 20%. Ask and shop around.
If you have found your dream home and have not intention to moving-out/sell, then the fixed rate loan is more ideal. Reason: You are staying put, so the key consideration is not to get hit by “interest shock” anytime through out the loan term. By locking into a fixed rate now, it will take away your worries about interest rate fluctuations.
