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.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Consumer Discretionary Stocks to Buy for 2022
stocks to buy

The 12 Best Consumer Discretionary Stocks to Buy for 2022

Consumer discretionary stocks may be among 2022's most challenging places to invest in. But these picks could overcome several sector headwinds.
January 4, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022

Recommended

2 Clever Ways to Gift Your Home to Your Kids
buying a home

2 Clever Ways to Gift Your Home to Your Kids

Be sure to consider the taxes you'll owe if you want to give the family home to an adult child.
December 23, 2021
How Snowbirds Can Be Taxed as Florida Residents
retirement

How Snowbirds Can Be Taxed as Florida Residents

If you live in a high-tax state during the summer but winter in Florida, you can save big bucks by establishing residency in the Sunshine State.
October 25, 2021
15 U.S. Cities With the Highest Average Home Prices
real estate

15 U.S. Cities With the Highest Average Home Prices

Home prices have rocketed higher across most of the country, but housing costs are acutely painful in these 15 U.S. cities.
October 20, 2021
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
October 13, 2021