Rich Billings, VP/Market Manager – Citizens First Bank

What is the right loan amount and product solution for me?


Two very important questions as you consider financing your home purchase are loan eligibility and affordability.

The application process with a lending institution determines your eligibility largely based on an objective assessment of your current and historical income, other monthly debt obligations, and credit repayment history.  As a general rule, you are eligible for a mortgage if the expected monthly payment is less than a third of your monthly gross income.  It could be slightly more or slightly less depending on other monthly debt obligations such as payments for autos, student loans and credit cards.

Secondly, in addition to eligibility, affordability should be evaluated while understanding that assessing “eligibility” vs. “affordability” may produce different outcomes.  Unlike eligibility, affordability requires you to assess and consider non-debt related matters.  This relates to lifestyle and lifecycle circumstances and may include expenses from child care, education, size of household and current and future changes in your life…like upcoming retirement or future college education expenses.

You need to discuss this with your mortgage loan officer even though these factors aren’t part of the objective assessment to determine your eligibility.

Once the optimal mortgage amount question is answered, determine whether a fixed rate or adjustable rate (ARM) product solution is most suitable.  Clearly, ARMs are not for everyone.  Still, discuss and evaluate the possible benefits and risks with your mortgage loan officer to determine if an ARM is appropriate.

Speaking personally, my wife and I have had six mortgage loans during the past 36 years. Four of these, including my present mortgage, were ARMs.  Each decision was based upon personal circumstances and objectives, generally tilted toward the anticipated time we expected to own the home with the outstanding mortgage.  None of these decisions was based upon the lower rate or payment that an ARM offers. But remember, what’s best for one borrower isn’t always best for another.

Several key points come into play when considering an ARM.  Your initial interest rate is lower than a traditional fixed-rate loan.  While the interest rate may change, there are payment impact limits with both annual and lifetime CAPs that control or contain interest rate fluctuations.   Also, many ARMs provide both a fixed rate and a variable rate, essentially offering a fixed rate for an initial period (one, three, five or seven years) followed by an adjustable rate after the fixed-rate phase of the mortgage lapses.

When properly evaluating and understanding the details, you may find the inherent risks of an ARM are offset by the possible benefits.


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