The best mortgage is one you can afford for as long as you plan to remain in the home. Affordability varies with the type of mortgage. The two most common are fixed rate mortgages and adjustable rate mortgages (ARM).

A fixed rate mortgage is constant for the length of the loan, usually 30 years. Shorter-term fixed rates, typically 15 or 20 years, carry lower interest rates, higher payments and less money paid out than with a longer-term loan. Longer-term fixed rates have smaller monthly payments and are easier to budget.

• With a fixed rate mortgage, the interest rate is set for the entire term of the loan
• Future monthly payments are easy to project
• Provides stability if you plan to be in your home for a long time
• If interest rates rise, yours remains the same
• If interest rates drop, yours remains the same

ARMs initially come with rates lower than a fixed rate mortgage but periodically rise or fall, depending on economic factors. The lower initial rate can help you qualify for a larger loan. If you know your income will rise to keep pace with an ARM's periodic adjustment and you plan to move in a few years, an ARM could be a good choice.
The interest rate on an adjustable rate mortgage may be adjusted periodically, usually in response to changes in the Treasury Bill or the London Inter Bank Offering Rate (LIBOR)

• The interest rate is fixed for a certain period of time (the adjustment period) and varies depending on market rates
• Lower initial payments
• Great deal if you plan to own a home for short time
• Fixed rate during adjustment period
• If interest rates fall, your rate falls too
• May allow you to qualify for a larger loan
• Less long-term stability
• After the adjustment period, interest rates typically rise

When rates are low, an ARM maybe the ideal choice if you know this purchase is a short-term solution. However, a fixed rate mortgage can offer stability and long-term benefits that add up over the years. Choose carefully and consider how long you plan to live in your home while deciding which rate to choose.

Helpful financial terms you need to understand

• Basis point. One one-hundredth of a percentage point. For example, if mortgage rates fall from 7.50% to 7.47%, then they've declined 3 basis points. A full percentage point is 100 basis points.
• Loan length. The life, or term, of a mortgage is 30 years by industry standards, but 15- and 20-year-term loans are also available.
• Rate reduction. Should you opt for a shorter-term loan, you can reduce your interest rate even further. For example, a 15-year rate is typically one-quarter to one-half percent lower than one for 30 years. The smaller rate and shorter term mean you will pay less over the life of the loan than if you borrowed the same amount over a longer term.
• Monthly money. The shorter the loan term, the higher the monthly payments.
• Rate cap. Generally, ARMs have caps on how high it can adjust during each adjustment period and over the life of the loan. This protects you from drastic market changes, but doesn't offer the stability of a fixed rate loan.
• Income increases. ARMs are a good choice for someone who knows their income will rise and at least keep pace with the loan rate's periodic adjustment cap.
• Rate changes. When the first adjustment occurs (usually between six and 12 months) and how often it adjusts depends upon the terms of the loan. After the first adjustment, subsequent modifications can occur every six months, once a year or longer. Should rates fall, so does your monthly payment.
• Rate configuration. To come up with an ARM rate, the lender adds a "margin," usually two to four percentage points, to the index. Its interest rate adjusts up or down, depending upon current economic trends and is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages.
• Closing costs. There exists numerous types of closing costs. Check with your agent to see what applies to you.

Your agent makes the buying experience rewarding by walking you through the real estate process. Their experience and expertise will benefit you throughout by pointing out advantages and disadvantages of certain types of loans and interest rates. Your agent will also act as your personal advocate and liaison between you and the lender as you proceed through the approval process and closing by working with your lender on a regular basis.

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