Choose the rate, payment and term that’s right for you
Which mortgage fits your specific home buying situation? This is when you get down to business regarding your home loan’s monthly rate, payment and term. A mortgage calculator can help you crunch the numbers for several possible situations. Do you want the lowest interest rate, the lowest monthly payment or the shortest loan term? Each option has its advantages and disadvantages.
You’ll also want to consider how long you plan to live in the property. Will it be your home for the next couple decades, or do you plan to live in it for four or five years and then upgrade? Here we’ll help you breakdown your options.
Fixed interest rate
The appeal of a fixed-rate mortgage lies in its predictability: When you choose this option, you lock in an interest rate and will make the same payment every month until you pay off the loan. Particularly popular due to their affordable, stable, long-term monthly payments, a fixed-rate mortgage is a great option if you’re purchasing a home that you plan to live in for an extended period of time. You can lock in your rate and know exactly what you’ll owe each month—no changes and no surprises, ever.
- Pros: Fixed-rate mortgages are predictable, and you don’t run the risk of an increase in interest rate and monthly payment amount.
- Cons: Interest rates are generally higher than an adjustable-rate loan, and you’ll likely pay more over the course of your mortgage.
Adjustable interest rate
Adjustable-rate mortgages generally have a set, low interest rate for the first years of your loan term. After that, the interest rate adjusts periodically, which can be good or bad depending on the current interest-rate environment.
Because ARMs typically offer lower rates, they can be a great choice if you’re purchasing a condo or starter home that you’ll outgrow sooner rather than later.
- Pros: ARMs tend to have lower initial interest rates than fixed-rate mortgages, and you can take advantage of a lower rate without refinancing if your rate adjusts in a low-interest-rate environment.
- Cons: If you’re planning on staying in the home for the long term and interest rates go up, you could end up with a significant spike in your monthly payment.
Lowest monthly payment
If getting the lowest monthly payment is your priority, you’ll want to look into a longer-term loan. Just keep in mind that a longer term means more interest accruing over time—you’ll end up paying more than you would have with a shorter-term loan. Another route to a lower monthly payment is a larger down payment.
- Pros: Monthly payments are more manageable, and you can use extra money in your cash flow for other things.
- Cons: More interest accrues over the life of the loan, and it in turn takes longer to pay off.
Lowest interest rate
If you have a high credit score and a low debt-to-income ratio (DTI), chances are you will qualify for a low interest rate. While you obviously want to secure the lowest rate, you’ll want to be mindful of what you can afford each month.
A lower interest rate typically means a shorter loan term, so you’ll pay your loan off quicker, but in doing so you’ll be paying more on a month-to-month basis.
- Pros: The lower the rate, the less you’ll spend on interest.
- Cons: A lower rate often involves a shorter loan term, and thus higher monthly payments.
Shortest loan team
A shorter term means fewer payments overall and less interest paid, both of which can be enticing. If you can afford the larger monthly payments, choosing a shorter term makes a lot of sense.
- Pros: The shorter the term, the faster you pay off the loan. You could also save significantly on interest.
- Cons: Monthly payments will be higher.
Crunch your numbers
It can be helpful to run a few different hypothetical scenarios to see how each option would affect your bottom line. Our online tool, GRaffordable can help you crunch the numbers to get an accurate estimate, not just a ballpark figure. By asking some of the same questions a loan officer would ask, GRaffordable helps you make the most informed decision about your mortgage options, at your own pace and with no obligations.
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