The right loan for you
Morris Digital Works Wire Service

Now that you've decided to buy a house, the question is how? Which loan is right for you?

There are several kinds of loans. The most common are fixed-rate mortgages and adjustable rate mortgages (ARM).

A fixed-rate mortgage is the traditional way of financing a house. It simply means that the rate stays the same for the life of the loan, usually 15 or 30 years. The advantage to a fixed-rate mortgage is that the monthly rates will stay the same. However, if you lock in your rate when interest rates are high, your rate will not go down if interest rates should fall.

A 30-year fixed-rate mortgage is recommended for people who plan to stay in their house for a number of years and are looking for security. A 30-year mortgage takes longer to build up equity in your home, but it keeps the monthly payments low.

A 15-year fixed-rate mortgage pays off your loan in 15 years. The payments are higher per month, but equity is acquired quickly. These loans are recommended for those planning to sell their house in a few years but still want a stable rate.

Adjustable rate mortgages (ARMs) have a rate that changes periodically. The rate is usually linked to a financial index, such as a Treasury security, so the rate can vary over the life of the loan, which usually lasts 25 to 30 years.

Arms usually have lower monthly payments than fixed rate mortgages, to start with. This makes them attractive to many home buyers. However, it is a gamble to have an ARM. Should interest rates go up, the lender could raise rates up to 2-percentage points per year, up to 6-percentage points during the life of the loan. This means if you start out with a rate of 6 percent, it could jump to 12 percent in just three years.

There are caps that can be placed on Arms One cap can be put on the amount the rate can jump in one year, and a second cap can be placed on the rate over the life of the loan.

Arms are advantageous during recessions when interest rates are low, but if the economy turns around they can also be a burden. There are two major things to consider when thinking about taking the ARM route. First, how long do you plan to remain in your home? Second, in what direction do you see interest rates headed?

Arms are great for people thinking about living in their home for a short period of time, when interest rates are low or may drop. In these instances, buyers will probably be able to save some money. Conversely, if you plan to stay in your home for a long period of time or if interest rates are high or are rising, a fixed-rate mortgage would be the better option.

There are a couple other types of mortgages to choose from. One is a convertible loan. This is an ARM that can be converted to a fixed-rate mortgage after a specified number of years. A cost is usually associated with this process.

Finally, the last loan is a balloon mortgage. This is one way of shortening the length of your mortgage. It works like an ARM or a fixed-rate mortgage for the first several years. After a specified period of time, you owe a large payment, in some instances this is the remaining balance of the loan. The advantage here is that it keeps monthly payments low. This type of loan is recommended to people who are planning on selling their home within a few years.