How Much Mortgage Can Patricia Afford? (Accessible Version)

FDIC Money Smart Your Own Home ? Study Aid for Adults

How Much Mortgage Can Patricia Afford?

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Which mortgage do you think would be good for Patricia, based on what we know so far about how much mortgage she can afford?

Click each answer to understand the advantages and disadvantages of these traditional mortgages.

a. 30-year mortgage b. 15-year mortgage c. Traditional fixed-rate mortgage d. ARM

{User chooses a} Narrator: A 30-year mortgage has a higher interest rate than a 15-year mortgage, but her monthly payment would be lower.

{User chooses b} Narrator: A 15-year mortgage has a lower interest rate, and she could build equity faster than with a 30year mortgage, but her payments will be higher.

{User chooses c} Narrator: A conventional fixed-rate mortgage is a good choice if Patricia wants her payments to be predictable and easier to budget. It may be the safest option because she does not have to worry about her mortgage payments increasing--possibly significantly--if interest rates increase.

{User chooses d} Narrator: An ARM might be an option if Patricia is sure that she could afford a larger monthly payment (sometimes as much as double the initial payment amount) if the interest rate increases. If Patricia is fairly certain she will want and be able to sell her home soon, say in five years, she should look into an ARM that won't adjust for at least five years, because she could save significantly more than with a fixed-rate loan over the same time period. Even if she wants to move in a few years, she may want a fixed-rate mortgage because she might be unable to sell her home for the right price.

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