Selecting The Right Mortgage Loan
It was hard enough deciding to buy a home and then selecting one that suited you. Now, you have a harder decision to make – selecting the right mortgage loan for your purchase. Selecting the right mortgage loan would be one of the most important financial decisions you would ever make. With a multitude of mortgage loans available out there falling into a few categories, you need to select the one that fits into your financial situation perfectly. You may need to narrow down your choices to pick the right one.
Things To Consider
With so many types of mortgage loans available, selecting the right one will make a difference to your monthly payments. A look at the things you need to consider:
- Fixed Loan Or Adjustable Rate – This is one of the first decisions you need to make. In case of a fixed loan, the rate of interest is constant throughout the life of the loan, and you pay a fixed, known amount each month. In case of adjustable rate mortgages (ARMs), the initial rate of interest in the first year will be lower than the fixed rate. It will then be adjusted, which is usually a higher rate, unless the rates really take a nosedive. This is a right choice for a loan if you are sure that you will be owning this home for not more than 5 to 7 years.
Advantages/Disadvantages Of Fixed Loan – The advantages of the fixed loan are:
- You know the fixed payment for the life of your loan, enabling you to budget your finances more easily.
- No worry that the rate of interest will change suddenly, making your monthly payments difficult.
The disadvantages are:
- Because of the initial higher rate of interest, you will require a higher income to qualify.
- If the rates of interest fall quite low, you will need to refinance the loan.
Advantages/Disadvantages Of Adjustable Loan – The advantages of ARM are:
- Lower monthly payment due to lower initial rate of interest.
- If the rate of interest further lowers, your monthly payments will follow suit.
- Due to the initial lower rate and the monthly payment, it is easier for you to qualify for the loan.
The disadvantages are:
- Monthly payments will increase with the increase in interest rate.
- The whole loan could become unaffordable if the rate of increase is large enough.
- Term Of Loan Option – You can opt for a 15, a 20, or a 30-year loan term. You need to select the shortest option that is comfortable for you. If you take a loan of $100,000 at a fixed rate of 8.5% interest, on a 15-year term, your monthly payment will be $985, and on a 30-year term, it will be $769.
On a 15-year loan your total payments, principal and interest included, will be $177,300, and on a 30-year loan you will be paying $276,840.
You need to consider your financial situation and decide the type of loan that will suit your circumstances.
|