Choosing the right kind of mortgage is a lot like choosing a spouse. (That might sound like crazy talk, but hang in there with me for a minute.)
Like the millions of single men and women milling around out in the world, there are dozens of mortgage options from which you can choose. So, how do you know which mortgage is the right one for you?
Not like dating, picking a mortgage should not be by trial and error. When you date, you can go out with different people and quickly learn what you are looking for and not looking for in a spouse.
Uncovering which mortgage is the one you want to marry with the purchase of your home (or even a refinance of your home) should be a well-thought-out process that leads you to the best option for your personal financial situation.
1. Set Your Goals
“When you fail to plan, you plan to fail.” True story. Buying a home is a HUGE financial investment.
In fact, it is likely one of the biggest ones you’ll make in your lifetime. So, you have to set goals for it. One of the first goals you want to set is your intention with the home.
- Do you plan to live in the home for the rest of your life?
- Are you planning to raise your kids here and then sell and move into a smaller home?
- Is this a starter home for the next five years and then you’ll upgrade to a larger, more spacious home?
Once you move out (if you move out) will you sell or keep the home and rent it out?
You might be wondering what all of this has to do with choosing the right mortgage. The answer is it has everything to do with the type of mortgage that you choose. The length of your stay in the home affects all of the decisions you make in choosing a mortgage, from the term to the type, and more.
2. Pick a Term
The term of the mortgage is the total number of years the mortgage is going to be in place. A 30-year mortgage has a term of 30 years, for example. In fact, a 30-year fixed rate mortgage is probably one of the most popular mortgages because it tends to offer the lowest monthly payment (because the payments are spread out over a 30 year period, as opposed to 15 years, for example).
But, is this term right for everyone?
Not necessarily. It all goes back to your goals with the home and your goals with the mortgage. If you’re going to live in the home and have the mortgage for the next five (5) years, does it matter that the interest rate is fixed for 30 years?
No, it doesn’t.
If you’re going to live in the home for the rest of your life and you intend to pay off the mortgage in the next 15 years, then you do pay less interest (and less money in the long run) if you choose a mortgage with a shorter term, such as a 15-year mortgage. The same holds true if you only intend to live in the property for five years. The catch is that you have to be able to afford to make the monthly payments, which can be slightly higher because the term of the mortgage is shorter.