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What Mortgage Program is Right for Me?

What Mortgage Program is Right for Me?

    Selecting a mortgage program is one of the most important steps in the mortgage process.  It is key to select a mortgage program that you are comfortable with and what type of mortgage program you choose also impacts your interest rate, monthly payment and how much mortgage you can afford.  We review the three main types of mortgage programs below and provide a chart at the bottom of the page that outlines the positives, negatives and key features for each program.  Reviewing these resources will help you decide the mortgage program that is right for you.

    • Fixed Rate Mortgage: The most common type of mortgage program is a fixed rate mortgage because it involves the least amount of risk.  This is because the interest rate and monthly mortgage payment for a fixed rate mortgage can never increase and stay constant over the life of the mortgage.   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 mortgage 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) can change over the life of the loan.  The primary reason to select an ARM is because the interest rate and mortgage payment are lower than a fixed rate mortgage during the initial fixed rate period of the loan, which is also called the teaser period.  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 monthly payment could go down.  The key downside to an ARM is the risk that your interest rate and mortgage payment will increase in the future during the adjustable rate period of the mortgage.  An increased interest rate and monthly payment can be a financial shock to 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 interest rate and monthly payment can increase.  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 mortgage 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.  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 interest rate can increase in the future, which could cause your mortgage payment to go up even more.
    • Use our INTEREST ONLY MORTGAGE CALCULATOR to determine the monthly mortgage payment and worst case scenario for an interest only mortgage

    So what program is right for you?  It all depends on you risk profile and financial goals. If you are looking for certainty, then a fixed rate mortgage probably works best.  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 interest rates and mortgage payment during the adjustable rate period (when the interest rate and mortgage payment can change and potentially go up on an annual or semi-annual basis).  This approach is not without risk either, as there is no guarantee you could sell your property for more than you paid for it.

  • FREEandCLEAR Mortgage Instructional Video

    What Mortgage Program is Right for Me? Instructional Video

  • The chart below summarizes and discusses the main pros and cons for each type of mortgage program.  As illustrated by the chart, each program is suitable for a specific type of borrower in a specific situation.  Review the chart below to learn about each type of mortgage so you can choose the program that best meets your financial objectives.

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

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
  • 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.
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
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