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What Home Loan Program is Right for Me?

What Home Loan Program is Right for Me?

    Determining What Mortgage Program is Right for Me? is one of the most important steps in the mortgage process. It is key to select a program that you are comfortable with and the mortgage program you choose also impacts your interest rate, monthly payment and what size loan you can afford. We review the three main types of mortgage programs -- fixed rate, adjustable rate (ARM) and interest only -- below and provide a chart at the bottom of the page that outlines the positives, negatives and key features for each loan program. Reviewing these resources will help you decide the mortgage program that is right for you.

    • Fixed Rate Mortgage: The most common type of program is a fixed rate mortgage because it involves the least amount of risk. With a fixed rate mortgage, your mortgage rate and monthly payment can never increase and stay constant over the life of the mortgage. For a 30 year loan, your mortgage rate in month 360 is the same as your rate in month one and your loan payment never changes, despite any fluctuations in the economy or interest rates. The certainty of a fixed rate mortgage provides peace of mind that most borrowers prefer. The downside to a fixed rate mortgage is if interest rates go down you are stuck paying a higher rate and mortgage payment unless you refinance which can be costly and time-consuming. For most borrowers, however, the benefits and certainty of a fixed rate mortgage outweigh the risks
    • Use our FIXED RATE MORTGAGE CALCULATOR to determine the monthly payment and total interest expense for a fixed rate mortgage
    • Adjustable Rate Mortgage (ARM): Unlike a fixed rate mortgage, the interest rate and monthly payment for an adjustable rate mortgage (ARM) -- also known as a variable rate mortgage -- can change over the life of the loan. The primary reason to select an ARM is because the mortgage rate and monthly payment are lower than a fixed rate mortgage during the initial period of the loan. Because the monthly payment for an ARM is lower you may be able to afford a larger mortgage amount. Another reason to select an ARM is if you think interest rates are going to decline significantly in the future because your rate and monthly payment could go down. An adjustable rate mortgage is a good option if you know you are only going to have the mortgage for a specified period of time, such as if you plan to sell your home within a set number of years. The key downside to an ARM is the risk that your mortgage rate and payment increases significantly in the future during the adjustable rate period of the mortgage. An increased mortgage rate and monthly payment can cause payment shock for borrowers so make sure you understand the risks before selecting an ARM.
    • Use our ADJUSTABLE RATE MORTGAGE CALCULATOR to determine the monthly mortgage payment and worst case scenario for an ARM
    • Interest Only Mortgage:  Interest only mortgages are the riskiest and least common type of loan program. As the name suggests, the with an interest only mortgage you pay only interest and no principal for a set period of time, called the interest only period. Following the interest only period you pay both interest and principal plus the mortgage turns into an adjustable rate mortgage, so your mortgage rate and monthly payment can increase and potentially significantly. The primary reason to select an interest only mortgage is because the mortgage payment during the initial interest only period of the loan is lower than the payment for a fixed rate mortgage or an ARM, because you are not paying principal. Additionally, you can typically qualify for a larger mortgage amount with an interest only mortgage. An interest only mortgage also gives you the flexibility to pay down your principal balance on your schedule as compared to the regular amortization schedule for a fixed rate mortgage. The downsides to an interest only mortgage are that your mortgage payment increases after the initial interest only period when you start paying both principal and interest plus your mortgage rate can also increase. This would cause your monthly payment to go up even more which creates the potential for significant payment shock.
    • Use our INTEREST ONLY MORTGAGE CALCULATOR to determine the monthly mortgage payment and worst case scenario for an interest only loan

    So what mortgage program is right for me? It all depends on your risk profile and financial goals. If you are looking for certainty, then a fixed rate mortgage is your best financing option. If you have a higher tolerance for risk and are looking for a lower monthly payment or larger mortgage amount, then an adjustable rate mortgage or interest only mortgage may be right for you.

    If you know you are only going to live in the home for a relatively short period of time such as three to ten years and you are going to sell your home before the adjustable rate period for an adjustable rate mortgage or an interest only mortgage begins, they could be the right program for you. That way you benefit from the lower monthly mortgage payment during the initial period of the mortgage but you are not exposed to a potential increase in mortgage rate and monthly payment during the adjustable rate period, when your rate and payment can change and potentially increase on an annual or semi-annual basis. This approach is not without risk either, as there is no guarantee you could sell your property when you want to or for more than you paid for it.

  • FREEandCLEAR Mortgage Instructional Video

    What Mortgage Program is Right for Me? Instructional Video

  • Part of your decision depends on what direction you think mortgage rates are heading. If you think mortgage rates are going to increase in the future, you should select a fixed rate mortgage. If you think rates are going to go down, you may want to consider an adjustable rate mortgage or possibly an interest only mortgage. It is very challenging to predict how mortgage rates will change in the future, especially over the long term, so trying to take advantage of a potential shift in rates should not be your primary reason to select a mortgage program.

    We recommend that you use the comparison chart below to determine the mortgage program that is right for you. In addition to outlining how the programs work and summarizing their pros and cons, the chart assesses the risk level for each program and addresses key loan features including mortgage rate, loan term and amortization. The chart also compares mortgage payments and identifies which program is best, depending on the interest rate environment. As illustrated by the chart, each program is suitable for a specific type of borrower with a unique risk profile and financial objectives. Review the chart below to learn about each type of mortgage so you can choose the program that best meets your goals.

  • Mortgage Program Comparison
    Fixed Rate Mortgage Adjustable Rate Mortgage (ARM) Interest Only Mortgage (IO ARM)
    Summary
    • Interest rate and payment do not change over the life of the mortgage
    • Fixed interest rate and payment for first 3, 5, 7 or 10 years (fixed rate period)
    • Then interest rate and payment can change (adjustable rate period)
    • Pay only interest at fixed interest rate for first 3, 5, 7 or 10 years (interest only period)
    • Then pay both principal and interest plus interest rate and payment can change (adjustable rate period)
    Pros
    • Certainty
    • Lower interest rate and payment during fixed rate period
    • Lower payment if rates go down
    • Lower payment during interest only period
    • Qualify for larger mortgage amount
    Cons
    • Higher payment than ARM or Interest Only
    • Locked into interest rate if you cannot refinance
    • Uncertainty
    • Potential increase in interest rate and payment
    • Uncertainty
    • Payment increases when you start paying principal
    • Potential increase in interest rate
    Risk Level Lowest Higher Highest
    Term 10-40 years 30 years most common 30 years 30 years
    Amortizing Loan? Yes Yes Only for part of term
    Interest Rate
    • Depending on term, higher rate than ARM or interest only mortgage
    • Initial teaser rate lower than fixed rate mortgage
    • Initial teaser rate lower than fixed rate mortgage
    Can interest rate increase? No Yes Yes
    Can interest rate decrease? No Yes Yes
    Initial Mortgage Payment Highest Lower Lowest
    Lowest possible monthly payment Check Mark
    Highest possible monthly payment Check Mark
    Going to own property for short period of time Check Mark Check Mark
    Going to own property for entire term of mortgage Check Mark
    Think interest rates will go up significantly Check Mark
    Think interest rates will go down significantly Check Mark Check Mark
    Best for low interest rate environment Check Mark
    Best for high interest rate environment Check Mark
  • Contact lenders in the table below to learn about the programs they offer and to determine the mortgage program that is right for you.  Shopping multiple lenders is the best way to save money on your mortgage.

  • Rate Details*
    Loan Program:  
    Monthly Payment:  
    APR:  
    Rate:  
    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
    Total Lender Fees:  
    Loan type:  
    Property Value:  
    Loan to Value:  
    Credit Rating:  
    Date Submitted:  
    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    (Estimated)
    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
    (Estimated)
    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
    (Estimated)
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
    Total Monthly Housing Payments
    Lender Fees
    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of December 13, 2018
    • Lender
    • APR
    • Loan Type
    • Rate
    • Payment
    • Fees
    • Contact
    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click here for more information on rates and product details.
  • Sources

    Loan Options: https://www.consumerfinance.gov/owning-a-home/loan-options/

    Fixed Rate vs ARM: https://www.fdic.gov/consumers/assistance/protection/mortgages/looking/fixed-rate.html

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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