Finding a mortgage can be a demanding process. Not only are there hundreds of institutions offering mortgages, it can seem as though there are dozens of different types of mortgages themselves. Different interest rates, different lengths, and other features can be confusing. This article describes some of the options you may encounter as you shop for a mortgage. As you review your options, keep two thoughts in mind:
As the name implies, with a fixed-rate mortgage, the interest rate is set at the time you take out the mortgage and remains constant over the life of the loan. The monthly payment level also remains constant. Knowing what your payment will be can be reassuring.
Each monthly payment is comprised of interest and principal with early year payments being primarily interest, and payments toward the end of the mortgage being mostly principal. Most of the mortgage pay down comes late in the mortgage period.
Most institutions offer fixed-rate mortgages of 30 years and 15 years. The benefit of the shorter 15-year mortgage is that after 15 years, you will have paid off the loan, and you will own your home free and clear. You will also pay less interest over the life of the mortgage. The negative is that your monthly payment will be higher.
Comparing a 15-year Mortgage and a 30-year Mortgage
with Equal Interest Rates
|15-year mortgage||30-year mortgage|
|Total monthly payments over the term of the mortgage||$227,840.88||$323,754.89|
|Total principal paid over the term of the mortgage||$150,000.00||$ 150,000.00|
|Total interest paid over the term of the mortgage||$77,840.88||$173,754.89|
Choosing the term of a fixed-rate mortgage is usually a function of what level of monthly payment you can afford and how anxious you are to pay off the entire mortgage.
With an adjustable-rate mortgage, the interest rate and monthly payment can change as interest rates change. The rate is fixed initially and is subject to being reset based on changes in an interest rate benchmark. The big benefit to the borrower is that usually ARMs have interest rates (at least initially) that are lower than the rates on fixed rate mortgages. Sometimes it can even be 1½ to 2½ percent less.
There are several features of ARMs you should evaluate if you are considering this type of mortgage.
ARMs are attractive because of their lower initial rate. Your risk is that your rate and monthly payment will rise in the future. If you are comfortable you can accept an increased payment or if you are certain you will be moving in a relatively short time, the savings with an ARM can be substantial.