Should I get a fixed-rate or an adjustable-rate mortgage?

Here’s the difference between the two:

❑ Fixed-Rate Mortgage: Just what it sounds like, this option features
an interest rate that is fixed at a certain percentage throughout the life of the loan. Typically, the longer the term of the loan, the lower the monthly payments will be. With a shorter term, you will have higher monthly payments; however, you will realize a savings in the amount of interest you will pay over the life of the loan. Fixed-rate mortgages are recommended to borrowers who:

• Look for predictable payments, because the payment is the same each month over the entire life of the loan
• Are willing to pay a higher interest rate in return for protection against the possibility of rising interest rates
• Are interested in building equity in their property through monthly principal and interest payments

❑ Adjustable-Rate Mortgages (ARM): This type of mortgage provides
an interest rate and payment that periodically adjusts based on the current interest rate environment. With an ARM, you can tap the benefits of lower interest rates and payments in a falling interest rate environment, and the initial interest rate on this type of loan is typically lower than the interest rate on a fixed-rate mortgage.
ARMs are recommended for borrowers who:

• Seek extra borrowing power, based on a lower initial payment, than is typically available with a fixed-rate mortgage
• Want to take advantage of a lower monthly payment to save money
• Plan to refinance or sell their property in a few years

Your mortgage broker or lender can help you decide which option is best for your situation. Talk to one or more mortgage professionals, and check out the current mortgage interest rates (they’re usually published in your local newspaper, or you can check an online source like HSH Associates at www.hsh.com/today.html) to use as a comparison.

How do I determine how long the term of my mortgage should be?

You can basically break down mortgages into two sections: fifteen years or thirty years. Use an online mortgage loan calculator from a Web site like QuickenLoans.com (go to mortgage calculators, then to homebuyer tools and monthly payment estimator) to figure out which will work best with your budget, based on the home price range that you’re looking at.
Here are two comparisons:
Total loan price (home price plus closing costs, less down payment):
$150,000
Length of loan: 30 years
Interest rate: 6.5 percent
Monthly payment: $949
Total loan price (home price less down payment): $150,000 Length of loan: 15 years Interest rate: 6.0 percent (shorter-term loans generally have lower interest rates)
Monthly payment: $1,266
As you can see, the fifteen-year loan increases your monthly payment by $317, but the amount of interest saved over the life of the loan is a whopping $130,800, nearly the price of another home! Low interest rates have pushed some home owners to the fifteen-year option (a choice previously unattainable due to double-digit interest rates), although many still opt for the thirty-year loans to avoid higher monthly payments. It’s a decision you’ll have to weigh once you select a home and loan option.