This is an important question for all home buyers, but especially those who are buying for the first time.
Everyone’s situation is different, so answer this question with the following information:
How long do you plan on owning the property? If you plan on staying for three to seven years, you have alternatives to the traditional thirty-year mortgage. These include adjustable-rate mortgages (ARMs) and some type of balloon loan, both of which normally have lower rates than the fixed-rate thirty-year products. But note that they also may have downsides, so do your research.
Also consider whether your plans are likely to change. If you’re unsure, you may be better off with a thirty-year fixed product. Otherwise, when you have to refinance three to seven years later, you may find that interest rates are significantly higher than they are today.
How much are you able to put down on a property? The more of a down payment you are able to put down, the better the position you’ll be in. If you can make a down payment of 20% on a conventional (Fannie Mae) loan, you can avoid mortgage insurance, eliminating a factor that will add to your overall cost of owning the mortgage. If you choose an FHA loan, the size of your down payment is less important, as you’ll most likely have two types of mortgage insurance in any case.
Do you want a fifteen- or thirty-year loan? A fifteen-year loan, while it often offers a lower rate than its thirty-year counterpart, comes with a significantly higher monthly payment. However, if you can afford it, you could save thousands (if not tens of thousands) in interest over the life of the loan. Another option is the twenty-year mortgage, which will also accelerate the paying down of the mortgage. Your mortgage professional can help you decide which term is best for you.