Mortgage Rates

Your Loan Options

There are a variety of mortgage-loan programs available, and it's important to find the one that's right for you. Which one you choose depends on many factors, including how much money you have for a down payment, how long you plan to live in the home, your long-term financial outlook, current and anticipated interest rates, etc. Your goal should be to select the program and terms that best suit your particular situation.

No matter which program you choose, you may want to consider paying loan-discount points to get a lower interest rate on your mortgage, especially if you plan to live in your house long enough to reap the long-term return that this up-front closing cost can bring. Each point equals one percent of the loan amount - for example, one point on a $200,000 mortgage would equal $2,000.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) - also known as variable-rate loans - have interest rates that are periodically adjusted, keeping them in line with market interest rates. This means that when rates go up, your monthly mortgage payments may go up, too. On the other hand, when interest rates go down, your monthly mortgage payments may go down.

Depending on market conditions, ARMs may initially offer a lower interest rate than fixed-rate mortgages, and this may help you qualify for a larger loan. Bear in mind, though, that after a specified period (usually anywhere from three to ten years), your monthly payments may increase if interest rates increase.

There are various ARM products available, with different interest-rate adjustment periods. Many lenders show ARMs as two numbers - for example, the most common types of fixed-period loans include 3/1, 5/1, 7/1, and 10/1 ARMs. This type of ARM maintains the same initial interest rate for the first three, five, seven, or ten years of your loan. The interest rate then adjusts annually, and can move up or down as market conditions change. For example, the interest rate on a 7/1 ARM will not change for the first seven years but can change in the eighth year, and every year after that.

With ARMs, interest-rate changes typically are subject to two caps: one that applies to each adjustment period, and one that applies to the life of your loan. For example, a 7/1 ARM may have a 2 percent cap on interest-rate increases for each adjustment period, and a 6 percent cap on interest-rate increases over the life of the loan. So, for example, if interest rates had risen during your loan term, you could experience a 2 percent increase for each of the first three adjustment periods. But if interest rates continued to rise, your rate would not increase in the fourth adjustment period, because it would be limited by the 6 percent cap on interest-rate increases over the life of the loan. However, depending on movement in the market, it could decrease.

When discussing ARMs with your lender, be sure you understand the terms of the adjustment periods and whether the overall possible increase in interest rate is capped at a maximum rate.

Fixed-Rate Mortgages

Fixed-rate mortgages are the most popular type of mortgage loan. They offer the peace of mind that your interest rate will remain the same for as long as you have your loan, which may be a key concern if you expect to live in your home for a long time and like the predictability that a fixed-rate loan can add to your budget. Fixed-rate loans protect you against inflation, because interest and principal payments remain stable for the life of the loan, even when prices or interest rates rise.

The most common terms for fixed-rate loans are 15, 20, and 30 years. Though longer-term loans (such as 30 years, the most popular term) usually feature lower monthly payments, they also mean that borrowers pay more interest over the life of the loan. Many people don't mind paying this interest, however, because mortgage-loan interest usually is deductible from federal income taxes, and sometimes from state taxes. (Consult your tax advisor for details.)

Shorter-term loans can be a good choice for people who want to pay less interest over the life of the loan and build equity faster. For example, on a $100,000 loan at 7.5 percent interest, a 20-year fixed-rate mortgage can save you more than $58,000 in interest payments when compared with a 30-year mortgage.

Shorter-term loans also are popular choices when refinancing, because interest rates on 20- or 15-year mortgages are usually lower than those on 30-year mortgages. However, the higher monthly payments that accompany shorter-term loans may make them more difficult to qualify for.

Balloon Mortgages

Do you expect to keep your house for only a short period of time, or refinance in a few years? Then you may want to consider a balloon mortgage, which are a type of fixed-rate loan with a short term, often seven years. The principal and interest you pay are spread out, or amortized, over a longer period (usually 30 years) than the actual term of the mortgage, and so at the end of the balloon period you must refinance or pay the outstanding balance with a lump-sum payment.

Balloon mortgages often offer interest rates lower than 30-year fixed-rate mortgages. If you think you will be selling or refinancing your home in five to seven years and want a low monthly payment during that time, a balloon mortgage may fit your needs. However, before entering into a balloon mortgage, you should find out if you can refinance either before or at the time the balloon payment is due, and what conditions may apply. You should not consider this type of loan if you have concerns about meeting the refinance conditions or if you think the balloon term will be due before you are ready to move or refinance.