real estate

Pick the Right Mortgage

Finding the right mortgage requires a bit of research. Here's how to get started.

If you're in the market for a mortgage, you'll want to hunt for the best loan -- interest rate, points, closing (processing) costs and, on adjustable mortgages, the most favorable adjustment features. However, don't pay much attention to who's originating the loan or where the lender is. Odds are your loan will be sold once or twice over its term and you'll end up making your payments to a different lender or loan servicer.

For most home buyers, the choices are these:

1. Do you want a fixed-rate or adjustable-rate mortgage?

If you plan to stay in your house for years to come or indefinitely, then locking in a fixed rate, especially when it's relatively low, makes sense (the 30-year fixed rate hit a the historic low of 3.35% in late 2012 and hovered between 4.0% and 4.4% throughout most of 2014, according to Freddie Mac). Look for the best rate you can get. Paying 4.0% rather than 4.5% on a $200,000, 30-year fixed-rate mortgage will save you $59 each month.

On the other hand, say you plan to put the home up for sale in three to five years. You’d be smart to choose a hybrid ARM with an initial fixed-rate period (typically three, five or seven years) that matches how long you plan to stay. In this case points and closing costs are more important than getting the absolute lowest available rate, because you'll have less time to recoup those up-front costs with the lower payments and home-price appreciation. If you expect to refinance or pay off the ARM early, avoid a loan with a prepayment penalty, or try to negotiate away the penalty before you agree to take the loan.

2. Will your down payment be small or large?

Most lenders require a minimum of 3% to 5% down. If you put down at least 20%, you won't be required to pay an additional monthly premium for private mortgage insurance (PMI), which protects the lender if you default. The more you put down, the better the interest rate a lender will offer you.

3. Do you want a term of 15 or 30 years?

On a $200,000 loan with an interest rate of 4.0%, the difference in monthly payment between a 15- and a 30-year term would be $525. But15-year loans typically carry a slightly lower rate and reduce the interest you pay over the life of the loan. Borrowers who can afford the higher payment might choose the 15-year term in order to pay off the loan before their children head off to college or before they retire.

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