Choosing the best loan terms for your home can be complicated. It is never a “one size fits all” scenario. The best mortgage for you is one that is customized to your needs and your financial situation.
Finding the right loan takes work, including extensive research and monitoring the daily market for rate fluctuations. The best way to ensure you are making the right choice on your loan terms is to consult an expert. After all, your loan terms can have a significant impact on what you pay monthly and what you will end up paying on your mortgage loan overall.
Here are a few tips to help you get started on choosing the right loan terms for your needs.
Use an Online Mortgage Calculator and a Rate Watcher
There are numerous calculators and resources available online that help simplify the math.
Use a mortgage calculator to determine a monthly payment that works for you. Online mortgage calculators estimate your monthly costs using specific data, including your down payment, interest rate, and amortization period.
Other resources include mortgage rate watchers. At Seattle Mortgage Planners, we monitor rates daily to help you secure the best program possible with maximum savings. With this service we watch mortgage rates for you to help you determine if and when it makes sense to refinance.
Consider Pros and Cons of the Length of the Loan
Several factors influence whether you should choose a short-term or a long-term loan. The length of the term will depend on your personal financial goals and situation.
Choosing a shorter loan term may increase monthly payments, but save a ton in overall interest. Interest rates are generally higher for long-term loans, but monthly payments are usually much lower, as the mortgage is spread out over more time.
Long-term loans such as 30-year terms are generally the more common loans, as payments are more feasible for most individuals and families. However, if you can afford higher monthly payments, it is best to choose a loan that will end up having the least amount of overall owed money.
It is more rare to choose a 15-year loan term, but some homebuyers do if they want a shorter term with lower rates and plan to stay in their home for more than 10 years.
[Related: Tips for Deciding How Much to Offer on a House]
Compare Interest Rates/APR
Mortgages come with different interest rates, which can have a big impact on your monthly payments and also on the rate at which you pay off your loan.
The interest is a type of fee paid to your lender for the borrowed money. Often the more accurate percentage to look at is the APR, as it takes additional fees into account, including points and origination fees. APR is shown as a yearly rate, which is useful in comparing loan rates by the annual cost to you.
Rates will vary based on your credit history, your income, your down payment and loan amount, the type of loan, the length of the loan term, and the value of the property.
Fixed or Variable
A fixed-rate mortgage loan means that your interest rate stays the same throughout the duration of the loan. This is true even if you have a long-term loan, such as a 30-year term.
Variable loans are called adjusted rate mortgages (ARMs). As the name suggests, the interest rate changes throughout your loan term. There are also hybrid ARMs, which have a period with fixed rates and a period with fluctuating rates.
The benefit of hybrid ARMs is that they usually have lower interest rates than fixed-rate mortgage loans in their initial fixed-rate period. The downside of ARMs is the risk associated with future refinancing. Refinancing to a fixed-rate loan after the initial fixed-rate period of the ARM is not always possible. The value of your home or your credit score could affect your ability to refinance, leaving you with a higher interest rate.
Whether you choose a fixed or variable loan will often have to do with several factors, such as the length of time you plan to stay in your home.
Consider Length of Residence
The length of time you intend to stay in your home will affect what type of loan will benefit you most.
ARMs may benefit you more if you plan to stay in your home short-term. If you plan to stay in your home for a long period of time, a fixed rate is often the most beneficial.
The length of your residence will likely also have an impact on whether you choose a short- or long-term loan. If you plan to stay in your house for less than 10 years, it may be more advantageous to have a long-term fixed loan. This type of loan is also generally easier to qualify for.
[Related: How to Maintain Your Credit Score While Shopping for Mortgage Rates]
Consult an Expert for the Right Loan Terms for You
Mortgage terms are not all created equal. Finding the right fit takes time and research. Consult an expert for customized advice on choosing the best loan terms to ensure you are making the right decision for your unique financial situation and goals.
Seattle Mortgage Planners can help you make those decisions after we lay out your full financial picture together. There is no obligation if you reach out to speak with us about your options. Contact us today to speak with an expert
