Finding the Best Payment and Loan Options for Your Mortgage

There are many different mortgage options available to you. When it comes to choosing the right mortgage term and payment options, you need to assess the risk involved in each of them. You should carefully consider the loan offers that you receive. You should determine how much you can afford monthly while including the cost of your taxes and insurance as well. You should only borrow the bare minimum so you do not end up underwater on your mortgage. If you do not have a down payment saved you may want to consider an FHA loan. Banks may offer easier mortgage qualifying terms, but you should be careful to find the best long-term option to save money. 

Fixed Rate Mortgage

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The best mortgage option is a fixed rate mortgage. This option locks in a set interest rate, which means your rate cannot go up. You can always refinance if the interest rates drop, but you will not have to worry about your payment going up. You are protecting yourself from your payment rising when you choose a fixed rate mortgage. When you choose a fixed rate mortgage, you can choose the term of your loan. many mortgages come in then, fifteen, twenty and thirty-year options. The shorter term usually comes with a lower interest rate. This does mean higher payments, and you may end up choosing the option that you can best afford. 

Adjustable Rate Mortgage

Another mortgage option is an adjustable rate mortgage (ARM). This mortgage offers a lower initial interest rate, which means lower initial payments. However, the ARM will adjust after the initial payment option is over. Whenever the interest rate rises so will your payment. It is important to realize that you will need to make more money to be able to continue to afford the loan. Many mortgage brokers will emphasize this option and tell you that you can refinance in three years to avoid the adjustment, but interest rates may be higher at that point. Additionally, your house may not rise in value which can make refinancing so soon very easy.

Interest Only Payments

Interest only payments are another option when it comes to your mortgage payments. This option will lower your payment amount, and add greater flexibility to your payment options. However, you do not build equity with this option, and you may find yourself in a difficult situation once the interest only payment option runs out. You should be very careful when it comes to an interest only loan.Many people will use an interest only option when doing a construction loan and then refinance to a traditional mortgage when the home is finished being built. This can be a dangerous option.

Which Option Is the Right One for Me?

Generally, the fixed rate traditional mortgage is the best option. If you cannot afford a home on a thirty-year mortgage with a fixed rate, you likely are not in a position to buy a home. There are things you can do to make it easier to buy. You can work on fixing your credit report so that you qualify for better interest rates which means that you will have lower monthly payments. Additionally, you can work on saving up a larger down payment. This will reduce the amount that you need to borrow, which can make your home more affordable. You may also consider buying a fixer upper or moving to a different city or neighborhood that has more affordable housing options. You may also need to adjust your expectations, especially for your first home. 

Private Mortgage Insurance

Private mortgage insurance is required if you do not put down twenty percent on your home. Private mortgage insurance protects the lender, in the event you default on your loan. You can avoid private mortgage insurance through creative financing. By doing this you take out a second loan to cover the other twenty percent of the loan. The interest rate on your second loan is usually higher. Once your equity is lower than eight percent you can ask  the bank to assess your loan and have the PMI removed. You will not need to pay this for the life of the loan. Do not confuse this with homeowner's insurance that protects you if your home is burned down or damaged. As long as you have a mortgage, the bank will require you to carry this, but you will purchase it separately.