How Do I Choose the Right Mortgage Type?

© 2009, Brandon Cornett. All rights reserved.

Reader Question: “I am researching mortgage loans to see which type might be best for me. How do I choose the right mortgage for my situation? Any rules of thumb or other tips?”

The best way to choose the right type of home loan is by doing exactly what you’re doing — research. In fact, I would argue that home buyers should not choose a mortgage loan until the right choice becomes incredibly obvious. If you learn everything there is to know about the different options, choosing the best one should be fairly simple.

All mortgages have pros and cons associated with them. But if you consider your current financial situation and your future plans (and you combine this with the research you are doing), the right path will emerge. The pros will begin to stack up in favor of a certain option, and then you’ll know which mortgage is right for you.

There are many types of mortgages these days, but nearly all of them can be classified in one of three ways:

1. Fixed-rate mortgages keep the same interest rate over the life of the loan. This is the most popular type of loan among home buyers.
2. Adjustable-rate mortgages reset to a new rate every few years.
3. Hybrid loans combine both of the above qualities. They start with a fixed rate for a few years, and then they start resetting / adjusting after that.

If you plan to stay in the home for a long time, like more than five years, I highly recommend choosing a fixed-rate loan. This will give you predictability and stability over the entire life of the mortgage, because the interest rate will never change. And if you have a good credit score, you can get a darn good interest rate on a fixed mortgage right now (4.82% average at the time this article was published).

In addition to researching the pros and cons of fixed vs. adjustable mortgage loans, you should also look into the government programs available. There are several ways you can get a home loan that’s insured by the federal government. The FHA home loan is the most popular of these — especially right now, in the current economy. You would still apply through a regular lender, but the loan itself would be backed / insured by the government. The primary benefit of an FHA loan is the fact that you can put less money down … as little as 3.5%.

Tips for Choosing the Right Mortgage

We have covered a lot up to this point, so let’s recap some of the key points. In order to choose the right mortgage for your home buying situation, you should do the following:

• Continue your research, with an emphasis on the pros and cons of  each type of mortgage loan.
• Think about your long-term plans, how long you plan to stay in the home, etc.
• Get a clear picture of your financial situation. How much down payment do you have? How much can you afford to pay each month?
• Research the government-backed mortgage programs, such as the FHA loan.
• Check out our helpful guide: Steps to Buying a Home.
• Make your final decision based on careful research and forethought. And don’t take out more of a loan than you can afford to pay back!

I hope this information helps you choose the right home loan for your needs, and I wish you all the best in your real estate efforts.