Choosing a Mortgage Loan

The One Right for You

Since the majority of us need a mortgage to own property, selecting the best mortgage for your needs will ensure that you'll be a happy homeowner for many years to come.

As you begin your journey towards homeownership there are some basic ideas you should consider before obtaining a mortgage.

Basically, there are primarily two types of loans available, fixed rate and adjustable rate mortgages (ARM). A simple rule of thumb for selecting the type of mortgage that best suits your needs is going to be based on how long you plan on keeping the property.

The following table may help you in your decision making process:

Number of Years	Type of Loan
1-3	3/1 ARM
3-5	5/1 ARM
5-7	7/1 ARM
7+	30 or 15 year fixed

A fixed rate mortgage is when the interest rate stays the same for the entire duration of the loan. Fixed rate loans typically come in one of two varieties, 15-years or 30-years - the length of the term.

ARMs are a bit more involved, but basically, over the life of the loan, the interest rate will fluctuate in conjunction with the market. If interest rates go up, so too will your ARM, and the same is true if interest rates drop. ARMs come in many different flavors, and should carefully be investigated. They may seem more attractive initially given that their rates are typically less than a fixed, but they can quickly go higher than a fixed if the rates increase.

The following table may help you weigh the pros and cons for each type of mortgage loan:

Type of Loan

Pros

Cons

Fixed Rate Mortgage
15 Year
30 Year

•	Monthly payments are fixed over the life of the loan
•	Interest rate does not change
•	Protected if rates go up
•	Can refinance if rates go down

•	Higher interest rate
•	Higher mortgage payments
•	Rate does not drop if interest rates improve

Adjustable Rate Mortgage
Hybrid
3/1 ARM
5/1 ARM
7/1 ARM

These loans are fixed for a short period and then adjust annually, a 5/1 ARM is fixed for 5 years.

•	Lower initial monthly payment
•	Lower payment over a shorter period of time
•	Rates and payments may go down if rates improve
•	May qualify for higher loan amounts

•	More risk
•	Payments may change over time
•	Potential for high payments if rates go up

Often, a mortgage broker is a good resource for assisting you in choosing a loan. A mortgage broker can be very beneficial and actually save you significant money on a loan. Keep in mind, they too are middle-men and get a percentage of your loan as payment - which you'll pay for.