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How to Find the Best Mortgage

If you're considering your first mortgage, you probably find the prospect pretty daunting.

There's the personal commitment of settling down as well as the financial commitment of a 15 or 30-year agreement. Realizing that you have several options to consider should make the whole process less stressful.

In this article, we'll show you what your options are and how to choose the one that's right for your unique situation.

Knowing Your Mortgage Loan Options

The mortgage loan you choose will impact your life for years to come.

Many of us immediately think of the typical 15 or 30 year fixed mortgages whenever we think of buying a home. However, these are not the only types of mortgages available.

You may be surprised to learn that there are variable-rate mortgages, interest-only mortgages, ones with balloon payments, and more.

Why? Because everyone's needs are unique.

30-year Mortgage Loans: The Traditional Mortgage

picture of house

A 30-year fixed mortgage loan is an agreement to pay one set rate for your mortgage for a 30 year period at the end of which you will owe them nothing.

Fixed rate mortgages make up 75% of all home loans, and 30 Year mortgages are the most popular loans available. Does that mean it is right for you?

Pros and Cons of 30-year Fixed Loans

A 30-year fixed mortgage loan is an agreement promising to pay a set rate for your mortgage for a 30 year period (and own the home at the end of the period). People usually make higher monthly payments for fixed mortgages, but they have the security of knowing exactly what the payments will be for the duration of the loan.

People with stable incomes who intend to stay in their homes for 10 or more years are usually a good fit for 30-year mortgage loans.

The primary risk of these loans is interest rate risk.

Interest rate risk refers to a situation when rates rise or fall. In some cases, the rate you are paying is higher than current market rates.

However, if rates rise, you're still paying lower than market rates.

Let's say you were moving to Boulder, CO and found a house for $438,000 (well below the average home price in Boulder). With an average interest rate, you could expect to pay $2,038 per month for 30 years.

Breakdown of 30 year mortgage

Here's the breakdown:

  • $438,000 Home
  • $87,600 (20%) Down payment
  • 3.292% Interest rate
  • $438 Taxes
  • $67 Insurance

Your Payment: $2,038

15-Year Fixed-rate Loans

15 Year fixed-rate loans are quickly overtaking their longer-term counterparts in popularity. For those who can afford to may more per month, the savings over the term's length pay you back well.

Pros and Cons of 15-year Fixed Loans

15-year fixed mortgage loans are almost identical to 30-year loans except for the loan term period.

The benefit? You'll pay more towards principal and overall less money on interest. These loans are great for people who can afford the monthly payments and want the security of a fixed rate with an early loan end date.

For the $438,000 house in Boulder, you could expect to pay $2,848 per month for 15 years. (Notice the expected interest rate is lower)

Breakdown of 15 year mortgage

Here's the breakdown:

  • $438,000 Home
  • $87,600 (20%) Down payment
  • 2.539% Interest rate
  • $438 Taxes
  • $67 Insurance

Your Payment: $2,848

Adjustable-Rate Mortgage (ARM)

Adjustable-rate loans come in varying lengths, typically ranging from 1 to 10-year initial periods.

After the initial period, the interest rate increases or decreases.

For example, a 5/1 ARM has a fixed rate for the first five years and increases or decreases after that.

Pros and Cons of ARM's

Adjustable-rate mortgage loans have rates that fluctuate along with interest rates.

There is an initial period where the rate is fixed (five years, for instance), and then after the five years, the rate will change.

Shop around for an adjustable-rate mortgage with an initial period that works best for you.

Adjustable-rate mortgages usually have a low initial rate. However, if interest rates go up, and your monthly payment suddenly rises with it.

If you plan to live in the home for only a few years (the same amount of time as the initial period), getting an adjustable-rate mortgage might be a good option to consider.

Remember, when determining the mortgage payments, you can only estimate what they will be during the initial term.

Here's our $438,000house again with a 5/1 ARM. The estimated monthly payment for five years is $1,909.

breakdown of ARM fee structure

Here's the breakdown:

  • $438,000 Home
  • $87,600 (20%) Down payment
  • 2.608% Interest rate
  • $438 Taxes
  • $67 Insurance

Your Payment: $1,909

Interest-Only Mortgage Loans

After the housing crash, interest-only rates were referred to as "toxic". Now they are making a big comeback, thanks to additional legislation that (should) mean less risk for lenders and homeowners.

Pros and Cons of Interest-Only Mortgage Loans

You can get both fixed and adjustable-rate loans where you pay only the interest each month for a designated period (often 5 to 10 years).

The downside comes when your initial interest period ends.

If you planned on selling the home but are unable to do so, you'll need to make the larger payments. In other words, you'll have to make a decision about your new monthly payment with interest and the principle included.

Interest-only loans may be well suited for people in school or internships who know they will have a set income in a few years, (but don't have it now), or for those with a growing income.

With our $438,000 house and a 5/1 interest-only ARM, the estimated monthly payment for the first five years is $949.

breakdown of paying interest only

Here's the breakdown:

  • $438,000 Home
  • $87,600 (20%) Down payment
  • 3.25% Interest rate

Your Payment: $949

About Payment-Option Loans

Payment-option loans are similar to interest-only loans but a bit more complicated. While they arebecoming more popular, but they are controversial as well.

Pros and Cons of Payment-Option Loans

The mortgages give you the option to pay the interest or interest and principal each month.Sounds simple, right?

It gets complicated when there is not enough money is going to the principal.

However, people in professions with variable income (like sales, business owners, etc.) can benefit from this type of loan. They pay more when income is higher to make up for the lower payments at other times.

About Balloon Loans

picture of balloon

Balloon loans are characterized by lower monthly payments that end in a higher one-time payment.

Pros and Cons of Balloon Loans

Balloon mortgage loans are short fixed loans. The interest rate is calculated for the same amount of time as a long term fixed loan. Balloon loans last anywhere from 3-7 years, with the balance due at the end of the term period. At this point, you could sell, refinance, or switch to a long-term fixed loan.

This loan could be a good option if you aren't planning on living in the home long and want to sell in a good market, or are receiving a large amount of cash within a few years.

Beware of falling property values that may make it impossible to pay off your remaining loan balance.

At our new$438,000house in Boulder, assuming a5 year balloon period,the estimated monthly payment for the first five years is $1,478 with $313,005 payment due.

Breakdown of balloon payments

Here's the breakdown:

  • $438,000 Home
  • $87,600 (20%) Down payment
  • 3.0% Interest rate

Your Payment: $1,478

Balloon Payment:$313,005

Fixed or Adjustable?

Begin your mortgage loan journey by determining your long-term plans. Ask yourself where you plan to be in the next 5, 10 and 20 years. Is your family growing or shrinking? Is your job stable?

Once you know this, you can choose an option that is right for you.

Here are three things to consider that can help:

  1. How important is a set mortgage payment to your budget?
  2. Does it seem like the housing market is improving or declining?
  3. What price do you want to pay for a house?

Shop Around

couple doing price research

According to the Consumer Finance Protection Bureau , nearly half of today's home buyers consider only one lender for their mortgage and seventy-seven percent only apply with one lender. You could get a much better deal by shopping around.

Compare rates and loan packages and even get the lenders competing with each other to give you the best deal.

Use these tips to find the best lenders:

Trust your gut. If you don't like who you're talking you, you probably won't like their loan.

Talk to a handful of lenders to see what unique packages they offer.Research the various types of loans so you have a good idea of what you feel you need.

Determine what aspects are most important to you and don't forfeit them.

Get advice. Ask people you trust what they recommend.

Talk about your other offers. If someone offered you a good deal or one aspect of a loan you like, tell a new lender and see if they can't design a similar but better deal.

Arm Yourself With Knowledge

arm yourself with knowledge

It is best to make any decision based on information you gather yourself. We have some great tools to help you step into the mortgage loan arena prepared.

A chart like the one above can help you evaluate your rates. Use our mortgage rate calculator to estimate your payments.

Here are some ever handy mortgage tips including the general rule for how much you should spend on your home and how to "try out" your mortgage payment.

Conclusion

In the end, the best mortgage loan will be one chosen after thorough consideration and plenty of research.

If you expect to have the same stable job or career for the length of time you have the home, then a fixed mortgage is probably best.

If you want options and flexibility, there are many mortgage loan options to give you the perfect mix of freedom and security. You just have to keep asking questions until the right loan "calls out" to you.

Compare mortgages rates now and find one right for you.