Home Loans: What Type of Loan Should You Choose?  

Buying a home is an exciting and nerve-wracking prospect. Often the whole process can be somewhat overwhelming, especially for the first time homebuyer. This confusion can be cleared up with the help of a professional, such as a loan officer or mortgage broker. One of the most troubling questions in the whole process is: What type of mortgage loan should I choose? While you have two main loan choices, fixed rate and adjustable rate, within these categories are several options.

Fixed Rate Loan

A fixed rate mortgage loan is set up so that the interest rate remains at a specific fixed rate for the duration of the loan. This type of mortgage loan is the most common loan taken out by prospective homeowners. However, ask yourself several questions when it comes to a fixed rate home loan.

One key critical question is: Do I want to live in this house for at least five to ten years? If the answer to this question is, ''Yes'', then a fixed rate loan is probably the loan for you. Because the monthly mortgage payments will be the same for the life of the loan, this type of mortgage allows you, as the homeowner, to create an effective budget and stick to this budget. This sort of financial security allows you to better prepare for unexpected problems, and save for planned improvements. However, if you do not see your future new home as a long-term residence, a fixed rate loan is probably not the best bet for you.

Adjustable Rate Mortgage

An adjustable rate mortgage is a loan that has a lower interest rate initially but the interest rate will change after a period of one to five years and begins to fluctuate annually with the market. This type of mortgage loan allows homeowners to pay less for a house initially but then the payments will become larger as the interest rate fluctuates. This type of mortgage is a good choice for a homeowner who plans on reselling their new home within five years of buying it. The interest rate on the loan is the lowest in the beginning, usually lower than a fixed rate loan, so you will pay the least for the house during the years that you own it. However, for long-term homeowners this is not the best option. As the interest rate changes so does the payments and it could end up costing you more money in the long run.

Which Loan Is Right for Me?

When buying a home, keep in mind your long-term goals as you choose a mortgage loan. You must ask yourself certain questions such as:
  • What kind of job security do you have?
  • Are you planning any additions to your family?
  • Do you like the neighborhood where the home is?
  • Do you like the general area?
  • When do you plan to sell the house?
Keeping these questions in mind will help you determine what kind of mortgage loan is right for you and your new home.