Mortgage Choices

You've found the house of your dreams and now all you need is a loan. With dozens of competing lenders and mortgages to choose from, you may think that today's home loan market is very confusing. The challenge is to match the mortgage to your personal situations.

Though many mortgage choices are available, they all fall into two categories: fixed, in which the interest rate and sometimes the payments do not vary, and adjustable/variable, in which they do. There are also a number of "creative financing" alternatives that can be combined with either fixed or adjustable rate mortgages including shared appreciation, wraparounds, assumable loans, seller financing, "convertible" mortgages and/or buy-downs.

For years the fixed rate mortgage (FRM) was the most popular choice among home buyers and sellers. The advantage is that neither the interest rate nor the monthly payment changes. FRMs are no longer limited to 25 years. Other variations include 10, 15, 18 and 20 year maturity periods, which can save you a substantial amount of money, and bi-weekly and weekly mortgages, which will shorten the term of your loan.

An adjustable rate mortgage (ARM) is popular because of the lower initial interest rate, as compared to an often higher interest rate for fixed-rate financing. The lower interest rate makes it easier to qualify for a loan because less income is needed. In addition, the lower interest rate may allow you to borrow more money and purchase a larger or nicer home. ARM borrowers, generally, are not "locked-in" to high marketplace interest rates that may occur at the time they obtain their loans, since ARMs will decrease if rates decrease. Also, if you only expect to live in your house for three to five years, an ARM may be the best choice because the initial interest rates are lower. On the other hand, an ARM does not allow the borrower to anticipate precisely what mortgage costs will be over the life of the loan. At each adjustment period, your ARM interest rate and monthly payment may change. As a result, it may be difficult to plan your finances.

The Better Business Bureau suggests you shop around. Check with financial institutions in your area to see which variations are offered and which fit within your spending plan, and check on the reliability of the mortgage lender before signing any contract.