Harry Cassidy
HOME HAPPENINGS
July 14, 2004

Among the many stress-inducing activities related to buying a home, few can generate as much anxiety as choosing a mortgage.

It didn't used to be this way. For many years, a traditional 15- or 30-year fixed-rate mortgage was almost the only choice when it came to financing a home. Not anymore. Lenders today offer myriad choices that require buyers to consider their lifestyles and other variables.

Although the 30-year mortgage is still the one you read about most often, it's far from the only option for today's home buyers. If you compare mortgages, you're liable to encounter a range of rates, many of them attached to terms such as "fixed," "ARM" and "hybrid."

Here's an explanation of fixed and adjustable mortgages, two of the most common programs you're likely to encounter. Before buying a home, it's important to understand your financing choices and the pitfalls of each one. Picking the right mortgage will require you to examine your financial situation, personality and even your future.

By far the most popular type of mortgage uses a fixed interest rate, usually set for 15 or 30 years. Every month, for as long as you own your home, you'll pay the same amount. At the end of your loan, you own the home, free and clear. This is the financing method homeowners have used for generations.

The security of always knowing your payment comes with a downside, though. If interest rates substantially decline a few years after buying your home, you'll be stuck with a higher rate than many of your neighbors, unless you refinance.

Also, because your lender is agreeing to a set payment schedule, regardless of market conditions, you'll likely pay a slightly higher rate than if you agreed to allow your interest rate to change with the market.

That's exactly what happens with an adjustable-rate mortgage, or ARM. With this type of mortgage, which is growing in popularity, your interest rate and monthly payment change throughout the life of the loan.

The advantage is that most lenders initially will charge you a lower rate for the privilege of occasionally revising it. A lower interest rate gives buyers more purchasing power, which often means they can afford a pricier home for roughly the same payment as on a fixed-rate mortgage.

An added bonus is if interest rates drop, monthly payments on this type of plan could drop as well. The disadvantage is if rates rise, your payments could also increase, although you may also have the ability to refinance. Be sure to check if any pre-payment penalties apply, however.

There also are loans that combine elements of fixed- and adjustable-rate mortgages. Sometimes called "hybrids," they offer a fixed interest rate and payment for three, five or seven years before becoming an adjustable mortgage whose rate may change monthly or annually.

These loans are attractive to people buying houses they do not plan to live in for a long time or people confident their income will rise in coming years.

Picking a mortgage is a very personal choice. Whatever you decide, make sure the lender you choose fully explains the terms to you. Make sure you're comfortable with your decision, because you're literally going to live with — or in — it for a long time.

With interest rates near 30-year lows and the consensus that they will be rising toward fall, now is a great time to consider buying your first home or trading up to your next one.

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