Which Mortgage Option is Best?

Mortgage Options Boring is good! When it comes to a mortgage, you want plain vanilla — not the sugar coated, nut-filled, whipped cream-topped gooey goodness that got us into the mortgage crisis. Just a few years ago, banks were offering mortgages to anyone with a pulse, and even those without one! (Yep, mortgage fraud can be ugly).

At the height of the bubble, creative loans and exotic mortgages were the rage. Banks offered liar’s mortgages (no proof of income required), interest-only mortgages, no down payment mortgages, teaser rates, balloon mortgages, adjustable rate mortgages (ARMs) and other exotic mortgages. Those mortgages were dangerous for consumers and lenders alike, and we are seeing the aftermath right now.

When you look for a mortgage, stick to the fixed rate mortgage for a reasonable term.

15-year or 30-year fixed-rate mortgages are best for most people. If your lender starts talking about low-rate ARMs, or other exotic terms, quickly bring him back on track. You want a fixed-rate loan so you know what your rates will always be.

Most banks offer standard mortgage terms of 15 and 30 years, which is best for most consumers. You might be able to find terms in between those durations, but you don’t want to extend to a 40- or 50-year mortgage because you would end up paying hundreds of thousands more in interest — and in all likelihood, you would never pay it off.

Pros and cons of 15- and 30-year mortgages. A 15-year mortgage is the favorite of financial guru, Dave Ramsey, because it pays off your loan more quickly and you pay less interest over the duration of the loan (usually hundreds of thousands less). The downside is that the payment is usually several hundred more per month. Thirty year mortgages have lower monthly rates, but end up costing you more in interest over the life of the loan. If you can afford it, go for the 15-year loan, otherwise, go for the 30-year loan, which might allow you to buy a slightly nicer home as well.

Make a 20 percent down payment — or more! You definitely want a large down payment, and 20 percent or more is preferred. Why the magic 20 percent mark? Because 20 percent is the amount needed to avoid private mortgage insurance, which benefits the lender, not you. A 20 percent down payment also means you borrow less money, reducing your monthly payment and the amount of time it takes to repay your mortgage.

Shop for the best mortgage rates. The mortgage lending industry is still highly competitive, so do your due diligence and shop around for the best mortgage rates. Even a few tenths of a percentage point can save you tens of thousands of dollars on a mortgage.

Be patient. Finding the right home takes patience, and so can finding the right mortgage. If you cant find the right terms, then consider putting off your purchase for a few months. This can give you the necessary time to increase your credit score and save a larger down payment — both of which can save you thousands of dollars in the long run!