Which type of home loan is best for your new home?

With 30-year fixed-rate mortgage rates hovering at around 4.75 percent, most home buyers won't think twice about booking a conventional plain-old-vanilla home loan and calling it good. But if you were savvy enough to avoid the inflated real estate prices of years past, then you're probably smart enough to know that you need to explore all of your financing options in order to get the right mortgage with the best home loan rate and terms possible.

Look beyond mortgage rates when comparing conventional home loans

Although the interest rate on your loan is a primary factor in determining your monthly payment, the loan term is equally important. Conventional fixed-rate mortgages are available with a 15-year or a 30-year term, and 15-year loans usually offer a loan rate that is about a half a percent lower than a 30-year loan. Both the lower interest rate and the shorter loan term mean that you will pay less interest on the loan overall, but you will have substantially higher monthly payments. You can compare your monthly payments for a loan that has a 15-year term against a loan with a 30-year term using this simple loan calculator.

Adjustable rate mortgages (ARMs) offer low rates

If you don't plan on staying in your home for the long haul, or if you'll be refinancing your home in a couple of years, then an adjustable rate mortgage (ARM) may be a good option for you. For example, there are ARMs available today that have a fixed rate of 3.75 percent for 7 years, which is about 1 percent lower than the going fixed-rate conventional loan. Of course if you don't pay off your mortgage or refinance your home within the 7-year fixed-rate period, then you will have to deal with a new, adjusted rate, which can mean monthly payments that are more expensive when your new rate is higher than the original rate.

Your mortgage calculations need to include the upfront expenses of a loan

When comparing your financing options, you need to weigh all the costs associated with each potential loan. These expenses include such items as loan origination fees, appraisal fees, mortgage insurance and other loan closing costs. When financed over the life of a loan, these expenses affect the interest rate that you are actually paying on your mortgage, which is called the annual percentage rate (APR). If you want to do an apples-to-apples comparison of two loans, then you can use this online mortgage calculator to determine the APR of each loan being compared.

Once you have explored all your financing options and researched the available loan products, then you will know which home loan is right for you.

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