Guide to Mortgages

Currently there are a variety of mortgages to choose from, and it can often be difficult to decide which type of mortgage is best. We advise every prospective home owner to thoroughly investigate their mortgage options, preferably with a professional mortgage broker, to determine which is the best for your situation. Most clients do not qualify for all loans, but if you do qualify for more than one, you may save yourself money in the long run by doing this research early, well before the pressure of signing a contract looms.

Fixed Rate Mortgages

These are mortgages with a fixed interest rate over the life of the loan. You might consider this if you:
  • Plan on living in your new home for many years, and/or
  • Prefer the stability of knowing how much your payment will be each month. Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be the best choice for you. Once your loan amount and interest rate are locked in, a fixed rate mortgage will guarantee that you will have the same payment over the entire life of the loan. This can be a great choice when  interest rates are low, as you protect yourself from future rate increases. However, if interest rates are high at the time you take out a fixed rate mortgage, you’ll be stuck with that high interest for the life of the loan. You can, of course, choose to look into re-financing.

30-Year Fixed-Rate:
  • This is most common choice for first-time homebuyers. It is also the easiest loan to qualify for.
  • Monthly payments are lower than for 15-year and 20-year loans.
  • For income tax purposes, this term provides the maximum interest deduction.
  • Because repayment is spread over a full 30 year span, the monthly payments are lower than most other loans.

15-Year Fixed-Rate:

This is similar to a 30-year fixed, only you pay off the loan in half the time.
  • The advantage to this is that you build up equity and own the home free and clear faster.
  • The potential disadvantage is that your rates on a 15 year fixed will likely be higher. Thus, the 15 year could be a riskier loan for clients worried about their ability to pay their monthly rate or their job security.

Adjustable-Rate Mortgages (ARMs)

If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate. Generally, the interest rate when you take out your loan will be lower than a fixed-rate mortgage. Please note that this is true initially, not necessarily long-term. Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income is not sufficient to cover the highest possible payments, then this option is not for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up. Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate]) and your payment will be based on the index your lender uses plus a margin, generally of two to three points. Get the formula used by your lender in writing and make sure you understand what it means. Fortunately, the amount an ARM can increase is limited. There are “caps” on how much your lender can increase your rate, both for a period of one year and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you’ll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.

Convertible ARMs If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.

Government Loans

Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.
  • VA Loans: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
  • FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase “FHA approved” when looking at ads for homes.