How to Select the Right Mortgage

In light of the historic drop in real estate prices and interest rates, this is arguably the best time to buy a home this country has seen. However, lessons learned from the bursting of the real estate bubble have compelled lenders to become choosier about the mortgages they offer. Consumers can respond by more carefully discerning the most beneficial mortgage that is tailored to their needs and will serve them well in years to come.

Types of Mortgages

Mortgages come in different shapes and sizes, but they all fit into two main categories: fixed-rate and adjustable-rate. A fixed-rate mortgage includes an interest rate that is determined at the time of purchase, and it does not change. This type of loan is best for people who plan to keep the property for an extended period of time. The terms, or the amount of time allotted to pay off the loan, are usually ten years, fifteen years or thirty years. Longer loans have lower monthly payments, but the total interest paid will be higher throughout the life of the loan. Mortgages bundle the interest up front, which means that in the initial stages of the loan, interest is the largest component in the monthly payments. A smaller portion of each monthly payment is applied toward the principal in the beginning than in later stages. Making additional payments will speed this process and build equity sooner. A larger down payment will equate to immediate equity. It can also make more attractive mortgage terms affordable, including a shorter-term loan. Shorter-term loans, such as ten or fifteen year loans generally have significantly lower interest rates, and they are a tremendous money saver if the monthly payments are affordable.

An adjustable-rate mortgage has an interest rate that fluctuates after the initial fixed-rate phase. This phase is usually three, five or seven years. The initial interest rate is typically lower than a fixed-rate loan, making this type of loan attractive to people who plan to sell the property within the initial fixed-rate stage. After the initial fixed-rate stage, the interest rate fluctuates. The rate can go up or down, based on market conditions. Use caution when considering this type of loan to avoid pay-off penalties or an unexpected rise in interest rate and monthly payments.

Choosing a Lender

While it is important to choose a lender with a good business reputation, it’s helpful to keep in mind that it is a common practice for a lender to sell loans to other businesses shortly after the closing, and possibly a second or third time throughout the loan period. This means the lender originally chosen may not ultimately be the lender who services the loan. It is best to compare lenders based on interest rates, lender fees and closing costs.

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Peter Wendt is a writer and researcher from Austin, Texas. Over the years he has become an expert in free SEO article directories. Readers who are interested in learning more should check out articleshare.info.