Which Mortgage Option Is Right For You?

If you've decided to buy a home, the next decision is how to finance the purchase. If you're like most people, cash probably isn't an option, and you'll need a mortgage. But you're not done making decisions yet. There are also several items you need to consider when choosing the right mortgage.

15 Year vs. 30 Year

As the name suggests, you can choose to pay off your mortgage over 15 years or 30 years. Other lengths are sometimes available, but these are the most common.

The 30 year mortgage gives you the lowest monthly payments, but it comes at a price. Because it takes the lender longer to get their money back and there's more time for you to default on the loan, interest rates are usually higher for longer mortgages.

The 15 year mortgage means you'll be paying less in interest, but you'll have higher monthly payments to worry about in order to pay the mortgage faster. That means a higher risk of falling behind if you lose your job or have unexpected expenses.

You'll also want to consider opportunity costs. If you can get a low interest rate, it may make sense to stretch out your mortgage as long as possible and invest more money into your retirement accounts.

Adjustable Rate vs. Fixed Rate

A fixed rate means you pay the same interest rate for the entire length of the mortgage. An adjustable rate goes up and down over the life of the mortgage and is usually tied to the federal prime rate or a specific government bond.

When interest rates are low, adjustable rate loans will usually start at lower interest rates than identical fixed rate loans. Lenders are betting that interest rates will go up in the future and you'll end up paying more interest than if you had gone with the fixed rate. Before you take the opposite side of the bet, you need to think about what you'd do if there was a huge spike in interest rates.

Down Payment Amount

To begin with, most mortgages require a specific percentage of the home price as a minimum down payment. This amount varies by the type of mortgage.

Additionally, increasing your downpayment amount can often reduce your interest rate. Putting more of your own money down means less risk for the lender. However, you don't want to put too much down so you still have a healthy emergency fund.

To learn more about your options, contact a mortgage broker at Rio Grande Credit Union today.