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How to choose the right loan for you

One size does not fit all when it comes to loan programs. The right type of mortgage for you will depend upon a number of considerations:

  • How long you plan to own your home
  • Your current and expected future finances
  • Your risk tolerance

When do ARMs make sense?

One of the most overlooked yet important considerations you should take into account when shopping for a loan is the length of time you expect to own your home. Because fixed rate mortgages are generally more expensive than adjustable rate mortgages, you should avoid paying for a fixed rate unless you anticipate that you will own your home long enough to offset the premium that you are paying for it. For example, if you are fairly certain that you will sell your home after three years because you are going to move out of the area at that time, it does not make sense to get a 30-year fixed rate mortgage. Instead, you should consider either an ARM or a hybrid such as a 3/1 ARM that will have a lower interest rate during those three years.

Adjustable rate mortgages are also appropriate if you are looking to minimize your monthly payment and are willing to accept frequent changes in your interest rate. For example, if you are a disciplined investor and can afford the mortgage payments should they rise, an ARM makes a lot of sense. Choosing an ARM allows you to maximize your short-term cash flow, freeing money to put into higher yielding investments.

What about fixed rate mortgages?

On the other hand, if you are not a disciplined saver, you should strongly consider a fixed rate loan. Since the payments are fixed from the beginning, you will not be surprised by an interest rate adjustment and find you can no longer afford your home.

This protection from rising payments is a feature that also makes fixed rate mortgages suitable if you are on a fixed income. In this case, a fixed rate ensures that you should always be able to afford your monthly payment.

And then there are the majority of people who select a fixed rate mortgage because they like the certainty of predictable payments. If the thought of a higher mortgage payment in the future would keep you up at night, then a fixed rate mortgage is probably best for you.

Your next steps

If you already have specific fixed rate and adjustable rate loans in mind, you can use our Fixed vs. Adjustable Rate Calculator to compare them.

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