Most people would tell you that the best mortgage is simply the one with the lowest interest rate. But when we look closer at mortgages, we see there are many more factors at work. A low interest rate is certainly part of the equation, but it’s not the only one.
The length and terms of the loan, as well as the type of interest rate, are also important factors. The choices you make in these areas will reflect your personal needs, goals, and, most significantly, your financial situation. You’ll also need to decide how much financial risk you are comfortable taking.
For these reasons and others, there is no such thing as a “one-size-fits-all” mortgage loan. The best mortgage for a young couple of high-earners is not necessarily the best mortgage for a family of four living on a modest income. Your monthly mortgage payments must be affordable while leaving you with enough money to cover your other expenses and for emergencies. You also need to consider:
- The length of your mortgage. Your choice from among a 15-, 20-, or 30-year mortgage will be based on how long you intend to stay in the house and how much you can afford to pay in mortgage payments each month. Young high earners can take a shorter term mortgage and pay a higher rate without putting a financial strain on their lifestyle. The family with many bills to pay would more likely find the 30-year loan with lower monthly payments to be the better mortgage choice.
- ARM or FRM. Adjustable mortgage rates (ARMs) can be riskier than fixed rate mortgages (FRMs). For someone who will only be in the house a short time, this may not be a concern. For those who are putting away tidy sums of money or anticipate making significantly more money in the future, lower rates now and higher rates later may also not be of great concern. For those who will sleep better at night knowing that the rate now will be the same later, fixed rate mortgages (FRMs) are more appealing.
- Closing costs. All mortgages have closing costs, and your lender should provide you with an estimate of how much your costs will be. Closing costs typically run between 2 and 7 percent of the cost of the house. Closing costs are determined by your lender, so if the amount you are quoted seems excessive, you may be able to negotiate them down.
- Points. A point (also called a discount point) is one percentage point of the overall loan that is paid up front, typically at the time of closing. Paying points generally lowers the interest rate on your loan. The best mortgage lets you decide whether or not you want to pay points, but this will depend upon your credit rating and what the lender offers.
In the end, you want a mortgage that does not strap you financially now or in the future. Low interest rates are certainly important, but there are clearly other factors that will indicate which mortgage is right for you.