Choices That Will Affect Your Loan

Choices That Will Affect Your Loan

Mortgage term. Mortgages are generally available at 15, 20, or 30-year terms. The longer the term, the lower the monthly payment if the same amount is borrowed. However, you pay more interest overall if you borrow for a longer term.

Fixed or adjustable interest rates. A fixed rate allows you to lock in a low rate for as long as you hold the mortgage and is usually a good choice if interest rates are low. An adjustable-rate mortgage (ARM) is designed so that interest rates will rise as interest rates increase; however they usually offer a lower rate in the first years of the mortgage.

ARMs also usually have a limit (or a cap) as to how much the interest rate can be increased and how frequently they can be raised. ARMs are a good choice when interest rates are high or when you expect your income to grow significantly in the coming years.

Balloon mortgages. Balloon mortgages offer very low interest rates for a short period of time-often three to seven years. Payments usually cover only the interest, so the principal owed is not reduced. However, this type of loan may be a good choice in an appreciating market if you think you will sell your home in a few years.

Government-backed loans. Government-backed loans, sponsored by agencies such as the Federal Housing Administration (www.fha.gov) or the U.S. Department of Veterans Affairs (www.va.gov), offer special terms, including lower downpayments or reduced interest rates-to qualified buyers.