Mortgage Types & Shopping for a Loan

It's Time to Shop...
For a loan, that is.

It's time to get serious about shopping for a loan. First, you'll need to understand the differences between various types of mortgage loans. Once you feel comfortable with the basics, it's easier to pick the most cost-effective mortgage loan for your situation. Then you can compare interest rates, points and closing costs. So let's study the specific types of loans and factors affecting their costs. Then we'll shop around.

Choose Between a Fixed Rate or Variable Rate Loan

That is the first step.

• Fixed-Rate Mortgages
  
  With a fixed-rate mortgage loan, the interest rate remains the same throughout the life of the loan. 30-year loans are the most traditional type of home loan, but 15-year, 20-year or 25-year fixed-rate loans are available, too. Generally speaking, fixed rate loans are the most predictable. Your interest rate doesn't vary so your monthly payments don't change either.
  
  
• Adjustable-Rate Mortgages
  
  Variable rate loans, on the other hand, are less predictable because the interest rate can change. The major advantage is your monthly payments will be lower at first, because ARMs offer an initial rate that is generally 2-3 percent below a comparable fixed rate mortgage. Not only will your loan costs be lower; your purchasing power will be higher because you may be able to qualify for a bigger loan with an ARM. But after that initial period your rate adjusts periodically, and that's the potential risk. Depending on changing market conditions and the particular "index" your rate is tied to, your loan costs could climb dramatically if rates go up. On the bright side, your payments could go down if rates drop.

What's the Better Deal?
It depends.

Interest rates can be unpredictable. Fixed rate loans are most attractive when interest rates are low. That's when most homebuyers will simply lock-in the current rate. When rates are high, more homebuyers purchase ARMs in order to keep their monthly payments lower for the first few years.

Sound confusing? Don't be concerned, interest rates can go up and down but the rules of the game never change. Before picking a variable rate over a fixed-rate loan, you need to review the pros and cons of each, and then decide which type makes sense for your situation.

Consider Other Factors in this Decision

You must plan ahead before deciding what's best for you.

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