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Now it’s time to take action! To decide what type of loan is best for you, take the following steps:

Step-by-Step Guide:

 Decide on a fixed rate or an adjustable rate
  1. Ask yourself how long you are going to be in your new home. (If the answer is five years, then you ought to be looking for a loan that is fixed for only five years).
  2. Ask your loan officer how much total interest will you pay on a fixed rate loan in the period of time you expect to stay in the home.
  3. Ask your loan officer how much total interest will you pay on an ARM that is fixed for the period of time you expect to stay in the home.
  4. Subtract (3) the total interest paid on the ARM from (2) the total interest paid on the fixed rate loan in the period of time you expect to stay in the home. The result is the amount you will save in interest payments (during the period of time you expect to own the home) if you choose the ARM.
  5. Now consider the risk involved in choosing the ARM. If the rate on the ARM is fixed for say, 5 years, and you stay in the home for more than 5 years, your payments after the fifth year could go up significantly.
  6. Decide if the total interest savings (the amount in step 4) are worth the risk of higher payments after the interest rate on the ARM is reset. Do you think you could comfortably afford the higher payments? How certain are you about the length of time that you will be in your home and, therefore, making loan payments?

Your main goal is to minimize the amount of interest you pay over a defined period of time, the length of time that you are likely to be in the home. If you choose an adjustable rate mortgage you should be fairly certain about how long you will stay in the home. That way you can select an ARM that has a fixed rate for the period of time you expect to own the home and have the loan outstanding.

 Deciding on the length of the loan
  1. Complete the table below by printing this page and using pen or pencil to fill it in.
    1. Enter the amount that you intend to borrow (the “Loan Amount”).
    2. Find the interest rates for a 15-year fixed mortgage and a 30-year fixed mortgage. Enter the amounts in the “Interest Rate” column.
    3. Enter the Loan Amount, Loan Period (Term), and Annual Rate (Interest Rate) from the table into the Mortgage Home Loan Calculator. Record the Monthly Payment and the Total Interest Paid for each loan in the table below. (Note: you must open the calculator using Microsoft Explorer)
    4. Subtract the Monthly Payment amount for the 30-year loan from the Monthly Payment amount for the 15-year loan and record the difference in the table.
    5. Subtract the Total Interest Paid for the 30-year loan from the Total Interest Paid for the 15-year loan and record the difference in the table.
  2. Consider the differences in the Monthly Payment and Total Interest Paid. The difference in the Total Interest Paid is the price you must pay in order to have a Monthly Payment that is lower (by the amount of the difference in Monthly Payments).

Loan Amount = $__________
Term Interest Rate Monthly Payment Total Interest Paid
15 years      
30 years      
Difference    

If you don’t have much flexibility in your monthly budget then you would likely prefer the 30-year mortgage. However, if you could afford the higher monthly payments on the 15-year loan then you could save a great deal of money in the long run. If neither of these options appeals to you then you should probably consider buying a less expensive home.

Key takeaways:

  • Your goal is not to get the lowest monthly payment. Your main goal is to minimize the amount of interest you pay over a defined period of time, the length of time that you are likely to own the home.
  • If you choose an adjustable rate mortgage, you should be fairly certain about how long you will own the home. That way you can select an ARM that has a fixed rate for the period of time you expect to own the home and have the loan outstanding.
  • If you choose a longer-term fixed loan, you will end up paying more total interest but you will have lower monthly payments than you would with a shorter-term loan.

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