Choosing the Right Loan for You

When obtaining a mortgage, you are likely to have lots of choices of loan types. These choices can sometimes be overwhelming, especially if you don’t have a meaningful way to compare them. You will likely have to consider fixed rate mortgages, adjustable rate mortgages (ARMs), and balloon mortgages, unless you are totally predisposed toward or away from one of these options.

In order to compare, you should get your lender to set a common interest rate and compare points. Setting a common interest allows you to compare only points. This makes it easier for you to make the true comparison you need to be engaging in – cost vs. risk.

Take this situation as an example – a choice of loans, all with six percent interest rates, including a 30-year fixed rate for 1.5 points, a 7-1 ARM (seven year initial adjustment period, then adjusted yearly) for one point, and a 5-1 ARM for .875 points (we will not consider balloons in this example).

In this case, the fixed rate mortgage may offer the best deal if you are planning to keep the mortgage any longer than seven years. The fixed rate loan requires you to pay only 0.5 more points than the 7-1 ARM, with considerably less risk to you. You are guaranteed to keep your rate with the fixed rate loan, but might be subject to rate increases with either ARM. The difference in points can fluctuate, and in some case fixed rate mortgages may be priced at such a higher level that it is worth the risk to take the ARM, even if you plan to stay long-term.

Remember, the rate-setting is only useful to pick which type of loan you want to go with. After you make this choice, you can choose from a variety of rate/point combinations to find the specific loan that best fits your needs and circumstances.