Selecting a mortgage isn’t an easy process. Get a better understanding of how professionals make the right decisions.
When it comes to choosing a mortgage, you have to make some critical decisions. The first decision is this, should you choose a mortgage with a fix or a variable interest rate. Let’s take a look at the benefits of each:
With a fixed interest rate mortgage, you’ll lock in a specific payment for the life of the loan. This makes it easy to plan your future finances, you know what the loan is going to cost.
With a variable interest mortgage, the interest rate will fluctuate based on a financial index. The most common is Libor, or the London Inter Bank Offering Rates Index. As the index to which your interest rate is link to fluctuates, your monthly payment will be adjusted periodically. This loan can enable you to take advantage of low interest rates, to get started in the mortgage. Since interest rates fluctuate, fixed rate loans normally start out at a higher interest rate than adjustable, the bank charges more because if rates go higher, they’ll lose out.
How do you choose between a fix and variable interest rate loan? It helps to take a look at the current interest rate and compare to historic averages. If interest rates are below historic averages, it may make sense to look at a fixed rate. That way your interest rate will remain fixed even if interest rates rise. On the other hand, if interest rates are above historic averages, it may be better to choose a variable rate loan, then as interest rates fall, your interest rate will fall as well.
Another fixed or variable consideration is how long you plan to be in the home. The shorter your plan on living in the home before selling it, the less time a variable interest loan will have to move up or down.
The next critical decision is this: Should you choose a 15 or 30 year term? This decision isn’t as simple as it might first appear, since you’ll be paying off the mortgage twice as fast. The monthly payments are somewhat higher on the 15 year mortgage than on a 30. But they aren’t twice as high. The interest rate is typically a bit lower because there less risk for the lender. In fact, over the term of the loan, you’ll end up paying about half the interest on a 15 year mortgage than you would on a 30 year mortgage. That adds up to a lot of money. If you can afford the higher payments and want to build equity faster, a 15 year term may work for you. If you need to use more of your income or other obligations a 30 year term maybe the better choice.
After you’ve made these decisions there are a number of additional things you need to compare, such as the APR or Annual Percentage Rate which include this and discount points as a percentage of the loan amount. You’ll want to compare a front expenses particularly down payments and closing cost, as well as, the cost of mortgage insurance.
When it comes to mortgages there is a lot to know and a lot to research. Maybe it’s time to speak with a professional.