Hello from Cedar Rapids, Iowa.  Welcome to the IowaMortgageGuy Blog!  Glad to have you as a guest and hope to see you back again soon.  Hope you find the information useful and informative.

Selecting the right mortgage is critical to the home buying process.  Therefore, it's important to understand that there are options.   When considering a mortgage there are several things the Iowa Mortgage Guy likes to ask his clients - which loan achieves your goals with respect to payment, down payment and price of new home desired.  As well, consideration should be given to the time the client intends to be in that home before selling or moving on and even market conditions or credit qualification.  Let's look at payment, price and down payment first and then move on to loan types and loan terms.

Your Goals

The most important person is you.  It is imperative that your goals are met with respect to payment, price and cash to close or this mortgage transaction may start off with unrealistic expectations.  You should consider your current housing/rent payment and monthly budget when looking at what you think you can afford, consider your cash available for down payment and closing costs and the price of the home you think you will need to fit your needs and be ready to discuss those items with your mortgage professional.  You may find that you have to adjust your goals in order to achieve the most important one.  For example, if you wanted a $900 a month house payment with Taxes and Insurance included and you wanted to purchase a home for $150,000 and wanted to put no money down, you may have to modify your goals to fit the one which is most important - the payment or the price in this example.  Obviously, consideration would have to be given to qualifying with income to debt ratio and your credit.

Loan Types

Home loans fall into one of two general categories:  fixed-rate and adjustable-rate (ARMs) mortgages.

Fixed rate mortgages have interest rates that stay the same for the entire life of the loan.   This provides you, the consumer, with a stable monthly principal and interest payment throughout the life of the loan and protects you from rising rates.     

Adjustable Rate Mortgages (ARM's) have interest rates that may be fixed for a period of time (usually 6 months to 10 years) but then they adjust based on market conditions at an interval pre-determined by the mortgage product.   The rates on these products are sometimes lower than for a fixed-rate mortgage.  Because of the lower initial rate, some borrowers may be eligible for a larger loan amount with an ARM than with a fixed-rate mortgage.   These mortgages also carry initial rate adjustment caps, periodic or annual adjustment caps and lifetime caps that keep interest rates from going above a certain level at each interval (initial, periodic of lifetime).  As an example, a 3/1 ARM may start at say 5% rate and then its initial adjustment (after 3 years) is capped at 2%, then the annual adjustment (after year 4) is capped at 1% and the lifetime is capped at 5% (max overall adjustment over the remaining term to initial rate - 5% initial rate+5% life cap rate = max rate over 30 years amortization).

Loan terms

The "term" of a loan is the period of time you will spend repaying the funds loaned to you back. The most common loan term is 30 years.  There are other terms out there like the 40-year term (lower payments and longer repayment), 20-year, 15-year and 10-year (all for shorter repayment periods).    Whether you'd be better off with a longer loan term or a shorter one depends on a number of factors, most notably your monthly income and long-term financial goals on equity position, sale of the home or move up or down to a larger or smaller property and the time frame you wish to accomplish this. 

Longer mortgage terms offer lower monthly payments, and are a good option if you're on a tight budget or would prefer to direct your monthly cash flow toward other investments or expenses or you plan to be in the home for a longer period of time.

Shorter mortgage terms mean higher monthly payments but allow you to repay the loan faster, save money on interest and build equity faster for that future home, wealth or borrowing power.

The bottom line is that you must have some sort of idea of your long range goals with respect to your home, financial objectives and wealth strategies and discuss them with a professional mortgage originator and make the educated choices that are best suited to YOUR goals and objectives.

Putting my interest in yours,