Mortgage Rates and Terms
If you are seriously considering homeownership you need to get serious about researching and understanding mortgage rates, terms, and home loan options. The decisions you make about your loan program, term and interest rate will impact you for a very long time. This decision will determine how much total interest you will pay, if and when the rate can adjust and how much your total payment will be on a monthly basis.
Choosing the right mortgage is the second most important decision you make. It is a close second to choosing the house you buy. Once you have closed on your loan you can't easily or inexpensively undo your decision, so you need to choose carefully and make an informed decision. Prior to picking a loan you have a few decisions to make about whether or not the loan is fixed or adjustable and the length of the loan term.
Types of Mortgages
The interest rate on a fixed rate mortgage does not change unless you are late on your house payment, while an Adjustable Rate Mortgage (ARM) can and typically does adjust over time depending on changes in the financial markets and how long you have been in the loan.
It is not fair to make general statements that one type is better than the other because it all depends on your personal needs, how long you intend to keep the loan, and market conditions. You definitely need to consult a reputable mortgage lender to determine which financing option is best for you.
Fixed Rate Mortgage
A fixed rate mortgage is by far a more common choice for first-time homebuyers because they are less risky and provide more predictable house payments over time. Fixed rate loan programs offer borrowers a peace of mind knowing that their monthly principal and interest payment won't change. If you don't want additional risk in your life and you intend to stay in the home for a longer period of time, a fixed rate loan is probably your best bet. The tradeoff though is that the going rate on a fixed rate is often, but surprisingly not always, higher than an Adjustable Rate Mortgage.
Adjustable Rate Mortgage (ARM)
An ARM is a good option to consider depending on current interest rates, your tolerance for risk and how long you plan on keeping the loan. If the rate you can get on an ARM is significantly lower than the quoted fixed rate and the rate will not adjust before you need to sell or refinance, then it could very well make sense to talk to your lender about whether an ARM is a good fit for you.
Before you make a choice between a fixed rate and ARM loan, you will need to work with a lender to make sure you fully understand the differences between your loan options to ensure you make an informed decision that best meets your needs.
The maximum length of time you will have to repay the loan is your loan's term. The longer you have to repay the loan the lower and more affordable the monthly payments. The shorter the term, the less interest you will have to pay over the life of the loan. A shorter loan term usually means a lower interest rate as well. Loan terms are usually expressed in years, such as 40, 30 or 15 year term with 480, 360, or 180 total monthly payments respectively.
The most common choice for most first-time homebuyers is a 30 year loan term. That is because the payments on a 15 year loan are oftern too high to be affordable. The 30 year loan is still by far the most common. You will need to consult your lender to sort out which loan term is the best option for you given your personal situation