Choosing The Right Mortgage
When it comes to mortgages, the length of the agreement and the sum of money involved make it vital that you do your homework. More so than almost any other financial transaction, it pays to get the details right on your mortgage. Your home may be the biggest purchase of your life, and the type of mortgage you choose significantly influences how long and how much you pay for it.
There are many factors to consider when shopping for a mortgage, but mortgage rates fall into one of two categories: fixed rate and adjustable rate. Knowing the difference between the two is key, as which you choose can make a big difference to your bottom line.
Fixed-rate mortgages are the most common type of mortgage loan. They use a static interest rate that locks in an unchanging monthly payment for the life of the mortgage. Fixed-rate loans most often come in 15-, 20- or 30-year terms.
- Short-term fixed loans, such as 15-year loans, typically have lower interest rates than 30-year loans, but higher payments, as the amount is spread out over fewer years.
- Long-term fixed loans, such as 30-year mortgages, have lower monthly payments, yet tend to have higher interest rates, and you will pay more interest over time.
- Because they're not susceptible to market forces, fixed-rate mortgages guard you against payment increases from interest rate spikes.
- If interest rates decline, your mortgage payment won't go down. But you can consider refinancing if rates drop low enough to offset the transaction costs.
Adjustable-rate mortgages (ARMs)
Adjustable-rate mortgages feature interest rates that fluctuate according to market conditions throughout the life of the loan. You may start with a lower monthly interest rate than the prevailing fixed interest rate, but you will likely end up with a higher rate after the initial loan adjustment period, which can last from 6 months to 10 years.
- ARM interest rates typically move up within three, five or seven years, and even if interest rates don't increase, your payment may still rise.
- When interest rates drop, your payment may not lower much, if at all.
- Early payoff penalties exist on some ARMs, making it impossible to avoid higher payments due to interest rate increases.
- After the interest adjusts initially, it may continue to change throughout the life of the loan.
Fees and closing costs
Other factors to consider when choosing a mortgage are the fees and closing costs. These can vary between lenders, so it pays to examine how these charges will affect your mortgage's overall price.
Typical fees include appraisal and application fees, origination/underwriting fees, broker fees and settlement/closing costs. The variety of fees can seem dizzying (and costly) to borrowers, but they are often negotiable. No-cost loans also exist, but they usually feature higher interest rates.
Buying a home can be a complex and tiring process. But by thoroughly examining your options, you can better your chances of finding the home loan that best suits your long-term needs.
Choosing The Right Mortgage
Featured Stories and Latest News
How Does Harp Help Underwater Borrowers?
If you are among the nation's estimated 20 million upside-down homeowners, the revised Home Affordable Refinance Program (HARP) may be playing your song. Go »
Is Refinancing Too Late for Seniors?
Retirees often don't think of refinancing, but current conditions make refinancing worth a fresh look to older Americans. Go »
Is There A Rise In Housing Bubble?
Home prices may be the same as in 2004, but other conditions have changed since then. Is history ready to repeat itself? Go »
Complete Guide on Buying A Home With Bad Credit
When mortgage rates fall, it's possible as a first-time home buyer to qualify for a bigger mortgage and more expensive house. But what if you have poor credit? Can you buy a house with bad credit today? Or should you work to improve your credit first? Go »
How Does Federal Reserve Affect Mortgage Rates?
The Federal Reserve recently cut interest rates to nearly zero in response to the coronavirus outbreak. Yet this strategy may not affect mortgage interest rates, even though it's aim is to boost the economy. In fact, mortgage rates have crept up in the last few weeks. Go »
Downton Abbey's 4 Financial Lessons
Though "Downton Abbey" is set in a distinctly different era, its plot holds some financial lessons that are relevant today. Go »
5 Ways to Maximize Your Appraised Home Value
By being informed and making your home presentable you can help to insure that your home gets the highest possible appraisal for the best mortgage loan or the highest sales price. Go »
Pros and Cons of Prepaying Mortgage
You don't have to wait out the remaining term of your mortgage to pay it off. Instead, you can make accelerated payments on an occasional or regular basis, which could save you big money in interest charges overall. But your best option may not be to prepay your mortgage. Understand the pros and cons; then learn how to crunch the numbers. Go »
5 Keys to Consider Before Investing In Real Estate
Real estate investments can provide growth and income, but they also carry some special risks. Go »
How to Protect From Home Title Fraud?
When you're a homeowner, burglars aren't the only crooks you should be concerned about infiltrating your property. An even bigger theft is home title fraud. This occurs when a bad actor alters ownership of your property title or deed by putting their name on it. And it can cost you plenty -- both in terms of dollars, the time it takes to resolve it, and damage to your credit. Go »