By William Brister
Selecting a mortgage is not only time consuming but confusing, given the large variety of loan packages
on offer in the market today. With different mortgage rates, varied costs and fees and multiple terms and
conditions, you need to be well informed to make the correct decision about which mortgage is best suited
Among other things, mortgage rates are extremely important while selecting a mortgage. Interest rates
fluctuate depending on different factors that influence the economy like prime rate, Treasury bill rates,
federal fund rate, federal discount rate and certificate of deposit rate etc. If the economy is doing well
and the demand for mortgages is high, the interest rates will also see a climb. On the other hand, if the
demand for mortgages is low in a poor economy the interest rates will drop as well.
However, there are several other factors that are as or perhaps more important than interest rates that
determine which mortgage is right for you. These primarily include your financial situation such as income,
savings and liquidity, your housing needs and duration of stay, the level of risk you are willing to take as
well as the term of your loan. All these factors need to be considered equally and balanced with ones present
position and future goals.
Before you decided on which mortgage is best for you, you will need a mortgage lender approval who based
on your credit rating will offer you a loan that he feels is within your reasonable risk limits. The mortgage
lender will take into consideration your ability to pay and then adjust your interest rates, points, terms etc
accordingly. Only after this will you be able to select a mortgage that fits your requirements both, personally
as well as financially. You can go in for mortgage refinancing at the end of the term if such a need arises.
The basic features while considering the selection of a mortgage are as follows:
1) Interest rate fixed or variable:
In a fixed rate mortgage your interest rate will not change during the entire duration of your loan. This
will enable you to know exactly what your periodic payout is and how much of the mortgage will be paid off at
the end of the term.
Federal Housing Administration Insured Loans (FHA)
Veterans Administration Loans (VA)
Farmers Home Administration Loans (FmHA)
With a variable rate, the interest will vary periodically during the life of the loan, depending on
interest rates in financial markets.
2) Duration of mortgage: short term or long term
The duration of mortgage is the length of current mortgage agreement. A mortgage typically has duration of six
months to ten years. Usually, if the term of the loan is short, the interest rates will tend to be low. A short term
mortgage is for two years or less and is appropriate for people who feel that the interest rates will drop in the
future, especially when it is time for renewal. A long term mortgage is for three years or more and most suited
for people who believe that current rates are stable and reasonable and want the security of budgeting for the
future. After the expiration of the term loan, you can either go for a renewal in mortgage at the current rates
or repay the balance principal owing on the mortgage.
3) Open or closed mortgages
Open mortgages are typically short-term loans and can be paid off at any time without penalty. Homeowners
who are planning to sell in the near future or require the flexibility to make large, lump-sum payments before
maturity choose these kinds of mortgages. Closed mortgages are committed after taking into consideration specific
terms. If you want to pay off the mortgage balance you will have to wait until the maturity date or pay a penalty.
4) Conventional or high ratio
A conventional mortgage is one that is not more than 75% of the appraised value of purchase price of the property.
The balance amount is paid through your own resources and is known as down payment. If you have to borrow more than
the stipulated 75%, then you will need a high ratio mortgage. If the down payment is less than 25%, the mortgage
will have to be insured. The insurer will charge a fee which will depend on the amount you are borrowing and the
percentage of your down payment. Fees range from 1% to 3.5% of the principal amount and can be paid up front or
added to the principal amount of the mortgage.
Paying Points on Mortgage Loans:
Paying points on mortgage loans lowers the mortgage rate on your loan. Typically, one point is one percentage
of the total loan paid up front, usually at the time of closing. The factors determining whether you should pay
for points will depend on:
The tenure of your stay- If its a short-term stay, paying points does not make sense as you pay more in
points than you save in interest. If you plan to stay for 10-20 years, points will pay off over time.
Deduction in tax- Paying points on a new residential mortgage allows you to deduct the money paid on that
years income tax return.
Not every mortgage is in consonance with your specific needs, but once you determine your goals both personal
and financial, you will have the ball rolling. To keep monthly housing costs down, ensure that:
Your down payment is as large as possible
Mortgage should be a long term one
Select a mortgage with a low interest rate
Keep the payments within your budget