How to Find the Mortgage That’s Right for You

The mortgage world can be confusing, and it pays to educate yourself about the pros and cons of different types of mortgages.

Fixed-rate mortgages offer rate and payment security, although they can be costlier than adjustable-rate mortgages (ARMs). So, while the low initial cost of ARMs may be tempting to home buyers, they do carry a degree of uncertainty. Consider the following:

  • A 30-year, fixed-rate mortgage is a stable fixed-interest-rate home loan. This is a good choice for borrowers who plan to remain in their homes a long time and want the security of knowing their monthly payment will never change.
  • A 15-year, fixed-rate mortgage typically has a lower interest rate than the 30-year fixed. Borrowers pay off the loan more quickly, and they also build equity faster. This appeals to buyers of less expensive homes and those looking to refinance without extending the loan out another 30 years.
  • An ARM adjusts periodically after a specified time (typically one year or five years) based on a mortgage index, such as Libor. If rates go down, payments are reduced, but if rates increase, payments increase. An ARM can be a good deal if you do not plan to remain in your home for long, providing you have the financial flexibility to cover higher payments if rates increase.

Other types of mortgages include interest-only mortgages, balloon mortgages (which have a low rate for a period of time before the loan balance comes due), and assumable mortgages, which can be transferred from a homeowner to a buyer, so a new mortgage isn’t required. This can be a selling feature.

You’ll want to choose a loan that minimizes your total cost (based on interest rate and upfront fees) over the time you expect to own the home, assuming the payment is affordable and you are comfortable with the risk you’re taking on.

You Can Compete (and Maybe Win) vs. an All-Cash Offer

Depending on location and market dynamics, cash buyers (those not requiring a mortgage) currently account for a third of all home purchases, according to CoreLogic, a firm that tracks real-estate trends.

As a buyer who needs a mortgage to purchase a home, it will be tough for you to compete against an all-cash offer, particularly in a market where multiple offers abound. From a seller’s perspective, an all-cash offer eliminates both hassle and risk, as do offers without appraisal or financial conditions, which, in a hot real estate market, can also reduce your chances of success. There are, however, some ways to make your offer more competitive. For example:

  • Try to avoid multiple-offer situations
  • Ask your agent to help you find off-market properties
  • Consider waiving the financing contingency clause, which allows you to cancel the contract if you don’t receive loan approval, or if an appraisal comes in below expected value
  • Increase your down payment

According to a recent article in the Wall Street Journal, securing a pre-underwriting letter may make your offer more attractive. Unlike a pre-approval letter, this one has teeth. It contains deep income and asset documentation, which sellers like to see, as it means you are a serious buyer, plus it may move you through the approval process more quickly.

Many cash buyers are overly confident and therefore submit unrealistic, low-ball offers. So, while cash is worth a 2 percent to 3 percent discount, sellers annoyed by the low bid might just accept yours instead.