Pick the Right Mortgage

Finding the right mortgage involves some digging around. Interest rates, points, processing costs, and adjustment features all affect how well a mortgage suits your needs.

The basics

There are two basic ways mortgage lenders charge you for using their money: through the interest charges you pay each month over the life of the loan, and through points or processing fees. Compare mortgages by their annual percentage rates (APR), which include the cost of points and other fees.

Lenders market a wide variety of mortgages, but when you get down to it there are only two varieties:

• Fixed-rate mortgages lock in your interest rate for the life of the loan. Your total monthly payment of principal and interest remains constant, but the portion of each payment allocated to principal grows. This is the more conventional method.
• Government Programs such as FHA, VA or USDA loans offer buyers added benefits to becoming home owners by either subsidizing monthly payments or offering the lowest interest rate available.  Many of the government programs are restricted by income and are targeted towards certain rural areas.
• Adjustable-rate mortgages (ARMs) generally start lower than their fixed-rate cousins but their interest rates can rise -- or fall -- during the term of the loan.  These loans are generally offered for short periods of times such as 3 or 5 years at the end of which the loan becomes due or adjusts to a rate much higher than the discounted rate you had enjoyed up to this point. 

What's best for you?

Deciding which mortgage is best requires a close look at your present circumstances, future earnings and financial goals.

Keep your needs in the forefront. Do you intend to stay put for many years? Then getting the best interest rate on a fixed-rate mortgage is probably your best bet. Paying 6.5% rather than 8% on a $100,000, 30-year fixed-rate mortgage will save you nearly $102 each month so pay special attention to what your interest rate will be.

On the other hand, say you plan to put the home up for sale in three to five years. Then points and closing costs (and the ability to pay off the mortgage without penalty) are more important than getting the absolute lowest available rate.

For most home buyers, the choices are these:

• Will your down payment be small or large?

• Do you want a long-term or shorter-term loan?

• Do you want a fixed-rate or adjustable-rate mortgage?

• Will you pay points for the lowest-rate mortgage or will you shop for a loan with few or no points and therefore a higher rate?