Home Financing - Choosing the Right Mortgage

The two most important factors to consider when comparing home financing options are loan term and interest rate.Loan termThe typical options are 15-year or 30-year mortgages.A 30-year mortgage will have a lower monthly payment and a higher interest rate than a 15-year mortgage. You will have a smaller monthly obligation but you will pay more for your house over time because you are paying it off with interest for a longer period. Conversely, a 15-year mortgage will have a higher monthly payment and a lower interest rate, so you will pay less for your house because you are paying it off in a shorter period."For most home buyers, especially first-time buyers, taking a 15-year (or 20-year) mortgage is out of the question," said Keith Gumbinger, vice president for mortgage tracker HSH Associates. "The higher monthly payments are often too much to handle for these types of buyers."Interest rateHere the choice is between fixed-rate and adjustable-rate home financing. A fixed-rate mortgage locks in your principal and interest payments for the duration of the loan. An adjustable-rate mortgage (ARM) does what it says. The interest rate adjusts at set times to match the index to which it is tied.The length of the fixed-rate term on an ARM typically can range anywhere from one month to 10 years. The longer the rate is fixed, the higher the interest rate you will get. But generally speaking, ARMs will cost you less in the short-term. With the ARM, both your monthly payments and interest rates should be lower than either a fixed rate 15-year or 30-year mortgage.The risk with an ARM is that when interest rates rise, you could end up paying much more than you bargained for. "You are subject to the vagaries of the market," Gumbinger said. That is why ... you want to maximize the fixed-rate picture to match your time frame.'"