November 16th, 2011 9:33 PM by Lehel S.
If you're currently home shopping or planning to refinance, it's important to decide on a specific mortgage program.
Let's take a look at some of the most popular loan programs out there to determine which will be the best fit for you.
This is the granddaddy of them all, and the go-to for most homeowners. It also happens to be the simplest mortgage to get your head around. Go figure. Put simply, it's a 30-year term loan with a fixed rate. In other words, the interest rate never changes during the life of the loan. So if you're risk-averse, and plan on staying in your home for the foreseeable future, this is your mortgage. Just know that the mortgage rate will be higher to compensate for the relative safety.
Another popular (and conservative) choice is the 15-year fixed. Just like the 30-year, the interest rate will never change during the life of the loan. But the mortgage term is cut in half, meaning monthly mortgage payments will be much higher. This program is good for the homeowner that actually wants to pay down their mortgage, while minimizing interest paid. You will certainly pay a lot less interest. Just be sure you can handle the larger payment!
While the 30-year and 15-year are the most popular and well known fixed-rate mortgages (FRMs), you may also come across additional options, such as 10, 20, 25, and 40-year fixed terms. Be sure to consider all of them when shopping your mortgage.
If you're a little more daring, you may also want to take a look at the adjustable-rate mortgage (ARM) options available. The most popular is the 5/1 ARM, which is fixed for the first five years of the 30-year term, and adjustable for the remaining 25. This makes it a hybrid ARM, meaning it's fixed for a while before becoming adjustable. If you don't plan on being in your home for long, this could save you some serious money, as the interest rate will be significantly lower than fixed-rate options. Just take caution, as the rate can also surge once those five years are up.
There are also a number of other ARMs, ranging from as short as a 6-month program to a 10-year product. Obviously, the shorter the fixed period, the more likely you'll wind up with an actively adjustable-rate mortgage. Also know that the shorter the fixed period, the lower the initial interest rate. So a 1-year ARM may be cheap at the onset, but adjust much higher before you know it. And a 10/1 ARM may price just slightly lower than fixed-rate options because of its long fixed period.
There are certainly plenty of options to choose from and your risk appetite, coupled with your unique financial/life position, should determine which is best. But don't rush your decision. Crunch the numbers using a mortgage calculator, make a long-term plan, and comparison shop before making your choice!