Which Mortgage is Best for You?

The right mortgage can go a very long way toward making life much easier in your new home. Choosing a mortgage that fits your circumstances and lifestyle is a crucial part of the home-buying process. The proper mortgage can provide stability if you want it, flexibility when it’s necessary, even build your net worth at a faster rate.

But which mortgage is the right one? The choices that are available are somewhat numerous, and can be quite confusing. However, honest answers to several pertinent questions can at least narrow the choices to a few general categories. For example, what type of income do you have? Is it level and stable, such as a weekly salary? Are you paid on commission and bonuses? How comfortable would you and your income be with a mortgage payment that could fluctuate? Also, how long do you intend to live in the house? Five years? Ten years? Thirty? The answers to these questions are road signs that will point you toward the most appropriate types of mortgages for you.

Generally, mortgages fall into one of two broad categories: 1) fixed-rate mortgages, and 2) adjustable-rate mortgages. Let’s say that you have a fixed salary and you are on a very solid, stable budget. A fixed-rate loan might better suit your financial needs; you know what your mortgage payment will be every month because it doesn’t change. But suppose you’re young, just starting out, and you can’t quite afford a big mortgage payment yet. Well, you could get an adjustable-rate mortgage and “lock-in” a lower interest rate and lower monthly payments for the first few years of the mortgage. Over those years your salary would rise, and you would hopefully be prepared for the higher monthly payments when the locked-in rate expired. Or you could sell the home before the higher rate came into effect. Let’s assume that you have a great job, making great money, and you can afford a higher mortgage payment. Then you might consider a loan that’s amortized over a fifteen- or even ten-year period. The payments would be considerably higher, but the amount of interest money that you would save would be staggering, and the rate at which your equity increased would be much greater. A third type of mortgage is the balloon mortgage. This mortgage typically has level payments for a number of years that do not amortize (pay down) the loan. After the payment period ends, the entire balance of the loan becomes due (called a balloon payment, hence the name). At that time, the owner will typically refinance or sell the house.

The types of individual mortgages that are available within these categories are many. Some have flexible payment options that allow you to pay interest only, principle and interest, or more. Others will even allow you to choose what you will pay on a monthly basis, depending on your immediate financial situation. If you’re a little short on money this month, then you can opt to make an interest-only payment. Next month, you can make a regular payment without being behind. But be careful. There are rules, conditions, and caps to most things, so look carefully before you commit to something that may not be all its cracked up to be down the road.

The key to finding the right mortgage for you is to be aware of your own financial situation, and then do your homework. Talk to several lenders, both banks and mortgage brokers. There are numerous programs that are available for almost any prospective home-buyer. Educate yourself on the types of mortgage loans that are available. After all, it’s your money that’s at stake. Make the proper choice, and you’ll be able to save lots of it.