Many people buying a home and shopping mortgages will eventually face the decision: "fixed or ARM?" Its a risk-vs-cost decision. Heres some perspective about fixed-rate options. 15-year Terms are the shortest of the commonly-available fixed rate plans. Interest rates are usually lower for 15-year loans. Payments reduce loan principal earlier, so you build equity (ownership) faster. And, of course, the loan is paid off earlier. 30-year Terms are the longest terms allowed, and probably the most common. For perspective, though, keep in mind that for most 30-year loans, the first 23 years of payments pay off more interest than principal. This may mean larger tax deductions, but it also means more interest paid. Keep your plans for living in mind; how long will you be in this home? What payments make financial sense? Look at the short-term and long-term math for eligible loan amounts, interest rates and payments to make the best decision for your situation.

Mortgage loans usually take decades to pay off, so the interest rate has a big impact on the actual cost of the loan over that time. A small change in interest rate can make for a huge swing in loan costs or payments. Interest rates fluctuate all the time; see the video on Prime on this website to understand some of the underlying factors. While you are shopping for a mortgage, ask lenders about rate lock-in to give yourself options to handle the immediate market situation. Keep in mind that the full cost of borrowing is higher than the interest rate alone. Lenders will provide an Annual Percentage Rate — APR — in Loan Estimate and Closing Disclosure forms. These include fees, mortgage insurance and the cost of points so you can understand the actual yearly cost. Its easy to get emotional about interest rates in shopping a mortgage; market rates are publicized constantly. Focus on comparing each loan option in its entirety rather than interest rate alone.

This short video summarizes the main kinds of mortgages available for home buyers: Adjustable Rate Mortgage, commonly called “ARM” Fixed-Rate Mortgages Balloon Mortgages 2-Step Mortgages ARMs, as the name suggests, will change over time. As market interest rates vary, the mortgage interest rates and payments will vary with them. Buyers opting for ARM loans take on responsibility for meeting payments even if interest rates go up significantly. Fixed rate mortgages lock in interest rates for the entire loan. If the interest rate on a fixed-rate loan is higher than an ARM today, the rate and payments will not change in the years to come. Balloon mortgages are sort of “shaped like a balloon” — smaller at the bottom, bigger at the top. In financial terms, balloon mortgages provider lower interest rates for the early years of a loan — usually 5 years, 7 years, or 10 years. Then the balance and interest are adjusted and refinanced, which sometimes requires a large ‘balloon’ payment. Two-Step mortgages are like super-simplified ARMs. Interest rates adjust, but only one time. Other options for mortgages are available, and worth investigating for your particular situation. For veterans, VA loans are a frequently a great option; see the VA loan series on this site for additional details. Other government programs for non-veterans may also be available. Real estate professionals and lenders can help you make sense of the current market and the options that might suit you best.

Buying your first home? Many lenders provide affordable mortgage options specifically designed to help first-time buyers. Home purchase is a big and often difficult step; these programs may help. If any of these apply: You have long-term debts You have, or have had, income irregularities Your credit history notes past challenges You have not accumulated enough for closing and down payments First-time buyer programs may be able to help. Talk to lenders early.

The down payment on a home affects many things — what home you can afford, loan size, financing terms and more. Getting some sense of the down payment you can afford can be difficult; people are quick to share advice from their experience, but conditions may have changed. In general, the higher the % of the purchase that you can cover in the down payment, the better the loan terms as a whole are likely to be. 5% of the home is currently the minimum down-payment amount. Keep in mind that any amount under 20% will generally require a mortgage insurance policy, which does increase borrowing costs. Keep in mind that the down payment is not the only sizable payment involved in buying a home. You will also need cash for closing expenses, moving, decorating, furnishing and possibly repairs. Check your credit history when youre sizing up down payment and loans; its also a vital part of the equation.

The term "mortgage" is commonly used to refer to the loan someone obtains to buy a home or property. Technically, the loan is one part of the arrangement. The other — the mortgage itself — is a legal claim (a "lien") that gives the lender rights to the home or property used as security, until the loan is paid off. The loan component of the financial package has two key features you should understand. Principal — the amount you are borrowing. For the lender, risk is balanced by their lien on the property. Interest — the additional amount you are paying, over time, to borrow the principal. Because mortgage loans usually take years to pay off, understanding that interest is compounded — "interest on interest" — will help you make sense of the total cost of the home. For fun — the roots of the word "mortgage" are death (mort) and pledge (gage). It captures the long-term promises involved in buying a home.

Beautiful, modern model homes and neighborhoods can make the job of comparing different builders and projects a challenge. Here are a few questions to help you. Ask everyone the same questions, like: How is the final price of a home in your project set, and when? Do you offer a warranty option? Can we have a copy of the warranty terms? How many different models are available? Can we see plans or brochures? Can I make changes and upgrades during construction? Until what stage? When do inspections take place in your construction schedule? Who would be supervising construction of our particular home? When is completion scheduled? What happens if there are delays? Also ask about other projects, and their history in this business: Are you insured? Licensed? How many other homes have you built? Where? Do you provide references, such as from prior buyers? Ask for written confirmation of things you consider to be key. Compare the answers from different projects, sales teams and builders. And consider involving a real estate buyers agent, or new-home cobroker, for professional advice.

Buying a new-construction home means contractual commitments. While the sales team at a project may understand the contracts very well, their job is not to look out for your interests. Since most of us do not buy homes and sign real estate contracts on a regular basis, theres a good argument to be made for having a knowledgeable attorney review a contract on your behalf. Construction project contracts are frequently "fill-in-the-blanks" because they involve many buyers and many homes. This can leave little room for negotiation, and as a result, less opportunity for questions and answers to clarify the contract. An attorney can help you be very clear about what you are committing to, whether or not they recommend changes in the contract. Their biggest value may be in explaining the contract to you, not necessarily re-negotiating it. If incentives, deals or specials on project homes compel you to sign quickly, ask for a clause making the contract contingent on review and approval by your attorney. Reputable builders should be OK with this, if you are prompt about arranging the review.

Nearly all buyers of new-construction homes — 88%, according to a nation-wide survey in 2013 — involved a real estate agent in the transaction. While it may not be required, if you are considering or buying a new-construction home, you should consider it. Most new-home construction projects — particularly large developments — have sales staff to assist in the transaction. They are knowledgeable about the project, the home models, and incentives. But in contrast to a real estate buyers agent, their job is the project, not you. Times have changed; builders expect real estate agents, and frequently the commission for an agent is built in to their pricing. Agents help guide buyers to realistic choices and help them in the complex purchase process. Building a relationship with an agent, and building their knowledge about a development, can also lead more people to the builders project. If you do have an agent, make sure they are contractually committed to represent you in the process. If you do not have an agent, look for a buyers agent or new-home cobroker to help.

Home mortgages are for completed homes, not construction projects. But construction projects may become completed homes, so there is a loan structure designed to cover construction, and convert to a mortgage at the appropriate point. These are commonly called "construction perm" loans. Loan terms during construction are frequently based on variable rates, and provide scheduled cash disbursements — "draws" — to match the stages of construction. When the home is legally complete-enough to qualify for a Certificate of Occupancy (CO), the loan is converted to a mortgage. Construction perm loans have the advantage of a single application and closing, and dealing with a single lender. If you are considering a construction perm loan, compare interest-rate trends to your construction schedule. Assume construction delays. Evaluate if a rate-lock on the mortgage stage looks advantageous. In addition, weigh the short-term cost of the construction-perm arrangement against your mortgage rate and its long-term costs.