When an individual or couple purchases a home, they typically go to a bank for a mortgage loan and usually get the traditional mortgage that the lender offers. This is either a fixed-rate, long-term loan or an adjustable-rate mortgage that may have to be refinanced in a few years when the initially-low interest rate expires in favor of a higher one (hence, the current housing-market and foreclosure crises). Little do they realize that there are many different types of mortgage loans available and they may not be getting the type that's best for them.

Often, lenders will not take the necessary time to explain all of the different types of mortgages that they offer. Many have been guilty of simply wanting to get the transaction completed as quickly as possible. If you're a good credit risk that's borrowing a lot of money, it's a good deal for the bank and they don't care whether or not it's the best product for you. So, you must be wary and look out for yourself. This is a very large and long-term transaction, and you should get the best possible deal for your financial future.

Although long-term mortgages are the industry's staple and may seem tempting to you because they typically offer smaller payments, they may not be the best in the long run. Your payments are smaller because the loan is being stretched out over many years. But you must also consider that you'll also be paying interest for all of those years. When amortized over the standard 30 years, you'll have paid at least two- to three times the sale price of your home (depending upon your rate of interest). In other words, a $100,000 home may end up costing you $300,000 when it's all said and done. Long-term loans are advantageous to the banks, but not necessarily for you.

Short-term loans (those with five-, ten-, fifteen- or twenty-year terms) generally demand larger monthly payments, but you're clearly paying a lot less interest over the life of the loan. When you're discussing mortgages with your lender, ask that he or she show you the two types side-by-side and reveal the amount of interest you'll pay for each loan. You'll be amazed at the savings in interest of the shorter-term mortgage. But, before you make a decision in favor of one, do a careful evaluation of your financial situation to determine if you'll be able to make the payments comfortably. Although it sounds like a great idea to get that mortgage paid off as quickly as possible, be absolutely sure that you can do it before you sign the papers.

Before you decide on the type of loan you want, talk to a number of different lenders and compare their loan offerings, interest rates and payment programs. If interest rates are low, you might opt for a fixed-rate loan so that the rate (and your monthly payments) will not increase regardless of what future market trends do. With a variable rate, your interest and payment can go down or up as the market dictates.

blog comments powered by Disqus