Selecting
the right mortgage is central to the homebuying process–that's why it's so important
to understand your options. You'll need to consider two things at the outset: which loan
type best meets your homebuying needs, and which loan term offers the ideal repayment
schedule.
Loan Types
Most home loans fall into one of two general categories: fixed-rate and adjustable-rate
mortgages (ARMs).
* Fixed-rate mortgages have interest rates that stay the same for the entire life of the
loan.
o You will have predictable monthly payments throughout the life of the loan.
o You'll be protected from rising rates, so your principal and interest payments can never
increase, no matter how high interest rates rise.
* Adjustable-rate mortgages have interest rates that adjust periodically based on market
conditions.
o The initial rate is fixed for an introductory period (usually one to ten years), and is
typically lower than for a fixed-rate mortgage. After that, the rate adjusts annually or
semi-annually based on a market index, but it can't go above a predetermined adjustment
cap.
o Because of the lower initial rate, some borrowers may be eligible for a larger loan
amount with an ARM than with a fixed-rate mortgage.
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