How to choose the right home loan

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Not all home loans are the right fit for all borrowers. When buying or refinancing a home, the smart consumer considers the pros and cons of different loans to be sure they choose a mortgage that suits their financial needs.

Loan terms

While many borrowers opt for a 30-year mortgage, 15-year loans are also popular, particularly when mortgage rates are low.

It’s important to think about next month, next year and the next decades when selecting a mortgage so you choose a loan that meets your financial goals. For example, if you plan to retire within 20 years, a shorter loan term will make it possible for you to retire mortgage-free. A short-term mortgage also is helpful for parents who want to own their home in full before writing college tuition checks.

Shorter-term loans can save you thousands of dollars in interest payments over the life of your mortgage. However, their aggressive payment schedule also includes higher monthly payments than longer-term loans. A mortgage calculator can help you compare those costs.

If you are refinancing a 30-year home loan on which you’ve made payments for many years, it may be best to refinance for a 10-, 15- or 20-year pay-off.

Mortgage options

This year, adjustable-rate mortgages, or ARMs, have been chosen by just 5 percent of loan applicants, according to the Mortgage Bankers Association. For some borrowers, however, an ARM can be a money-saving option.

ARMs offer a fixed-rate period of one, five, seven or 10 years, followed by a period with adjustable interest rates. If you plan to pay off your loan, sell the property or are sure you can afford the maximum payment when the rate adjusts, an ARM may be a good choice. Just make sure you know the ARM’s maximum interest to avoid the risk of defaulting should rates rise higher than you can afford.

Borrowers who intend to stay in their home for the long term should lock in a low interest rate on 15- or 30-year fixed loans.