Life Events

A mortgage is likely the largest debt you will ever take on, so the loan you pick matters as much as the house. The right choice depends on how long you plan to stay, how much risk you can tolerate and how your income may change.

Fixed-rate loans

With a fixed-rate mortgage, the interest rate and the principal-and-interest payment stay the same for the life of the loan. Common terms are 15 and 30 years.

• Pros: predictable payments, and no surprise if market rates rise.
• Cons: the starting rate is often higher than an adjustable loan's, and if rates fall you must refinance to benefit.

A shorter term usually carries a lower rate and builds equity faster, but the monthly payment is higher. A longer term lowers the payment but costs more interest overall.

Adjustable-rate loans

An adjustable-rate mortgage (ARM) starts with a lower rate for a set period, then adjusts periodically based on an index. Look closely at three things: how long the starting rate lasts, how much the rate can change at each adjustment, and the lifetime cap. An ARM can make sense if you expect to sell or refinance before the first adjustment, but you should be able to afford the payment at the highest possible rate.

Government-backed options

FHA, VA and USDA loans are insured or guaranteed by federal agencies and often allow smaller down payments or more flexible credit standards. They come with their own eligibility rules and fees, so compare the total cost, not just the rate. The Consumer Financial Protection Bureau has useful borrower guides at consumerfinance.gov.

Other features to weigh

• Interest-only loans keep early payments low but build no equity during the interest-only period, and payments jump later.
• Balloon loans have small payments followed by a large lump sum due, which you would need to refinance or pay.
• Private mortgage insurance is usually required with a small down payment and adds to your monthly cost until you have enough equity.

How to compare

1. Decide how long you expect to keep the home.
2. Get written loan estimates from several lenders on the same day, if possible.
3. Compare the annual percentage rate, points, closing costs and any prepayment penalty.
4. Test the payment against your budget, including property taxes, insurance and maintenance.
5. Ask what happens to the payment if your income drops.

Tax treatment also matters. Mortgage interest and points may be deductible if you itemize, which can change the real cost of one loan versus another.

If you are weighing loan options, contact our office and we can help you look at the numbers alongside your tax and cash-flow picture.