a mortgage can be a strenuous process. It can seem as though there are
dozens of different types with different interest rates, different lengths
and other terms. To find the "right" mortgage not only should
you consider those items, you should also consider your objectives:
- How long do you
expect to live in the home?
- Do you see the
mortgage just as a "financing vehicle" or do you have anxiety
about being in debt with a desire to pay off the mortgage as fast
- What is your
tolerance for increases in monthly payments?
should include types of mortgages (fixed rate, adjustable variable rate
and balloon) along with the lengths and other terms. Here is a calculator
that will help you determine monthly mortgage payment levels with different
types of mortgages.
As you look at these
results, there are a few things that you will probably notice:
- Even though the
interest rates on shorter term fixed rate mortgages may be lower,
the monthly payments are probably higher. This is because the amount
of principal payment each month is larger. You are paying down the
- Arms with shorter
term initial rate periods (for example, 1 and 3 years) usually have
lower rates and lower monthly payments. This is due to the "yield
curve" sloping upward with longer maturities. Longer term loans
have higher rates.
Even though shorter
term Arms and potentially balloon mortgages offer lower monthly payments,
it is important to understand that rates on Arms can increase after
the initial period and that the entire balance of a balloon mortgage
comes due at the end of the mortgage period. If you are considering
an ARM or balloon mortgage, be sure that you would be able to afford
a higher monthly mortgage payment if your rate increases. Here is a
calculator that can help you evaluate the impact of increasing mortgage
Consider Increasing Your Down Payment
the easiest ways to reduce your monthly payments is to simply borrow
less. A larger down payment will reduce the interest you pay and may
help you qualify for a lower rate. It can certainly improve your chances
of having your mortgage application approved. Increasing your down payment,
especially if your planned purchase is in the future is easier with
an automatic savings plan. Decide how much you want to save and over
what period. Then find out how much you need to put aside each month
to have the larger down payment you want.
- The size of your
mortgage payment should only be one part of your mortgage decision
- If "paying
off" your mortgage or significantly reducing your total debt
level is important, a shorter term fixed rate mortgage with a 20 or
15 year term may be right for you.
- If you plan to
live in your home for only a short time (for example, five years or
less), you may want to seriously consider an adjustable rate mortgage
with an initial rate term that matches your moving plans.
- Balloon mortgages
are usually less attractive than a similar term ARM. With a balloon
mortgage, you will need to secure a new mortgage at the end of the
term subjecting you to not only to changes in rates, but also the
costs and process of getting that new mortgage.
- Be sure that
you can afford your mortgage payments - both at the time you get it
and in the event that you get an ARM and rates have risen when the
initial rate period expires.
Choosing the mortgage
that is right for you is critical. Consider what you want your mortgage
to do for you. Factor in your plans for how long you anticipate needing
the mortgage (how long you are going to live in the home) and be sure
that you can accept the risk that your monthly payments may rise if
you choose an adjustable rate or balloon mortgage.