What Mortgage Program is Right for Me?
- 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
What Mortgage Program is Right for Me? Instructional Video
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.
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.
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.
|Fixed Rate Mortgage||Adjustable Rate Mortgage (ARM)||Interest Only Mortgage (IO ARM)|
|Term||10-40 years 30 years most common||30 years||30 years|
|Amortizing Loan?||Only for part of term|
|Can interest rate increase?|
|Can interest rate decrease?|
|Initial Mortgage Payment||Highest||Lower||Lowest|
|Lowest possible monthly payment|
|Highest possible monthly payment|
|Going to own property for short period of time|
|Going to own property for entire term of mortgage|
|Think interest rates will go up significantly|
|Think interest rates will go down significantly|
|Best for low interest rate environment|
|Best for high interest rate environment|