-
Step 1
Consider a fixed rate mortgage if you plan to be in your home for the long-term. Fixed rate mortgages come with a fixed interest rate, based on your credit-worthiness, and are usually in 15- or 30-year terms. There are no surprises with this mortgage type. Your payment will remain the same over the course of your loan.
-
Step 2
Consider an adjustable rate mortgage (ARM) if you plan to be in your home for only a few years. This type of mortgage can come in various configurations, the most popular of which are the three-year and five-year ARM. In this type of loan, you pay a fixed mortgage rate for a set period of time and then your interest rate adjusts to market rate. Most financial advisers will only recommend this type of mortgage if you are going to live in your home only for the initial fixed rate period and anticipate your property increasing in value.
-
Step 3
Consider 80/20 loans if you don't have a down payment. An 80/20 loan or a "piggyback loan" is one in which you take out two loans; one for 80% of the purchase price of the home and one for 20% of the purchase price of the home. The 20% portion essentially acts as a down payment so you can avoid paying private mortgage insurance or PMI.
-
Step 4
Consider an interest only loan only when you are in a difficult situation and need a financial break for the short term. This type of loan should only be utilized in a financial crisis. For this type of loan, you are only making payments on the interest portion of the loan. In other words, you are not paying down the principal at all.
-
Step 5
There are other less common types of mortgages, as well, including a balloon payment mortgage, option ARMs and simple interest mortgages, among several others. You can visit the Mortgage Professor's site (see resources below) to find out more about these types of mortgages.
