When deciding which mortgage best fits your financial situation, it’s important to consider your current circumstances, future earnings, and future plans. Knowing the answer to the following questions can help guide you toward the best mortgage loan for you.
Do you want a fixed-rate or adjustable-rate (ARM) mortgage?
A fixed-rate mortgage is best if you plan to stay in your house indefinitely, or at least for more than 10 years. The interest rate remains the same for the life of the mortgage and your monthly principal and interest payments never change.
On the other hand, if you plan to sell the home after a few years you might consider an ARM. The interest rate adjustments on these mortgages can cause your monthly payments to fluctuate, and you could end up having higher monthly payments that you anticipated. However, ARMs typically have low interest rates. You could also sell your home before the fixed-interest period ends.
Do you want a 15, 20, or 30 year fixed-term?
Consider how long you plan on staying in your home and the monthly payments you can afford. A 30-year loan would typically have lower monthly payments over a longer period of time. Interest rates are typically higher and you pay more interest over time.
A 15-year loan would have higher monthly payments, but lower interest rates over the life of the loan. If you can afford higher payments, you may choose a 15-year term so you can pay off the loan before paying for a child’s education or your retirement.
A 20-year fixed rate mortgage is a comfortable medium between the other two basic terms. Payments won’t be as high as a 15-year term, and you won’t have to make payments for 30-years. Typically, the rates for these loans fall between a 15-year and 30-year mortgage.
What type of ARM would work best for you?
The three most common ARMs are 3,5, and 7-year ARMs. Remember, these types of mortgages have an interest rate that will change throughout the loan. They all have adjustment periods that determine when and how often the interest rate can change. There is also an initial period where the rate doesn’t change; that can vary from six months to 10 years.
A 3/1 ARM has a fixed interest rate for the first three years. After that, the rate can change once a year for the remaining life of the loan. The same principal applies for 5/1 and 7/1 ARM. If the rates increase, your monthly payments will increase. If rates go down, whether or not your payments decrease could depend on your initial interest rate.
Finally, make sure to talk to your lender about your current and future finances so they can help you pick the best mortgage term.