30-YEAR FIXED RATE This standard bearer allows steady, predictable payments. The burden of this loan will ease in time as inflation–and your potential wage growth–makes the payments seem smaller. The disadvantage is that the payments will be higher than those initial low teaser rates of an ARM, so you won’t be able to afford as big of a house.
15-YEAR FIXED RATE If you can afford it, a 15-year mortgage offers quicker repayment and faster equity build-up. The rate is usually lower than the 30-year, so interest expenses are much lower. The current 30-year rate is 6.2 percent while the a 15-year goes for 5.9 percent.
5/1 ADJUSTABLE RATE MORTGAGE An adjustable rate mortgage allows you to start off with low payments and afford more house now. Two numbers identify these loans: the first is the number of years until the rate resets and the second is how often it will reset. These are for people who expect to move before the rate jumps. Americans typically move every seven years. If you expect your income to rise or to pay off a big expense (such as school loans) they might be right for you, too.
1/1 INTEREST ONLY MORTGAGE An interest only mortgage allows buyers to pay just the interest on a mortgage at first. Then, payments spike. A mortgage that resets in one year bets that interest rates have plateaued or are headed down. People who get these loans are typically counting their house value to rise, a strategy that worked well in recent years, but may not now.
OPTION MORTGAGE You can decide each month whether you’ll just pay the interest or work off some principal. This mortgage is designed for those with an erratic income, say, someone who gets a big bonus. The minimum payments are so low that you may actually sink deeper into debt with each minimum payment.
40-YEAR or 50-YEAR MORTGAGES You can get slightly lower monthly payments by stretching out the loan for a decade or two, but at a high cost. Someone with a 30-year $300,000 mortgage would pay $1,837 a month, for a total interest cost of $361,466. By stretching the loan out for 50 years, they would only save $213 a month and end up paying about $300,000 more in interest.