Evaluate Your Mortgage Options Finding a mortgage can be a strenuous process. It can seem as though there are dozens of different types with different interest rates, different lengths and other terms. To find the "right" mortgage not only should you consider those items, you should also consider your objectives: How long do you expect to live in the home? Do you see the mortgage just as a "financing vehicle" or do you have anxiety about being in debt with a desire to pay off the mortgage as fast as possible? What is your tolerance for increases in monthly payments? Your evaluation should include types of mortgages (fixed rate, adjustable variable rate and balloon) along with the lengths and other terms. Here is a calculator that will help you determine monthly mortgage payment levels with different types of mortgages. Mortgage Evaluation Calculator Home cost $ Down payment $ Fixed Rate Mortgage Alternatives Interest rates (assumes amortization over the term of the loan) 30 year fixed % 20 year fixed % 15 year fixed % Adjustable Rate Mortgage Alternatives (ARMs) Interest rates (assumes 30 year amortization) 1 year ARM % 3 year ARM % 5 year ARM % 7 year ARM % 10 year ARM % Balloon Mortgage Alternatives Interest rates (assumes 30 year amortization) 7 year balloon % 10 year balloon % Results Home cost Down payment Loan amount Monthly payment levels Fixed rate mortgages 30 year fixed 20 year fixed 15 year fixed Adjustable rate mortgages 1 year ARM 3 year ARM 5 year ARM 7 year ARM 10 year ARM Balloon mortgages 7 year balloon 10 year balloon Interest is compounded monthly. This calculator is to be used for estimation purposes only. The financial institution is not responsible for its accuracy and the results are not guaranteed. As you look at these results, there are a few things that you will probably notice: Even though the interest rates on shorter term fixed rate mortgages may be lower, the monthly payments are probably higher. This is because the amount of principal payment each month is larger. You are paying down the mortgage faster. Arms with shorter term initial rate periods (for example, 1 and 3 years) usually have lower rates and lower monthly payments. This is due to the "yield curve" sloping upward with longer maturities. Longer term loans have higher rates. Even though shorter term Arms and potentially balloon mortgages offer lower monthly payments, it is important to understand that rates on Arms can increase after the initial period and that the entire balance of a balloon mortgage comes due at the end of the mortgage period. If you are considering an ARM or balloon mortgage, be sure that you would be able to afford a higher monthly mortgage payment if your rate increases. Here is a calculator that can help you evaluate the impact of increasing mortgage rates. Analyzing the impact of an increase in your mortgage interest rate Initial Mortgage Loan amount $ Interest rate % Amortization period 30 years 20 years 15 years Monthly payment $ Understand what can happen If the interest rate is adjusted upward by: 1% 2% 3% New interest rate New monthly payment Increase in monthly payment Interest is compounded monthly. This calculator is to be used for estimation purposes only. The financial institution is not responsible for its accuracy and the results are not guaranteed. Consider Increasing Your Down Payment One of the easiest ways to reduce your monthly payments is to simply borrow less. A larger down payment will reduce the interest you pay and may help you qualify for a lower rate. It can certainly improve your chances of having your mortgage application approved. Increasing your down payment, especially if your planned purchase is in the future is easier with an automatic savings plan. Decide how much you want to save and over what period. Then find out how much you need to put aside each month to have the larger down payment you want. Save to increase your down payment Amount you want to save $ Interest rate you expect to earn % How many months to save Monthly savings needed Interest is compounded monthly. This calculator is to be used for estimation purposes only. The financial institution is not responsible for its accuracy and the results are not guaranteed. Start Your Automatic Savings Today There is no easier way to save than with an automatic savings plan. If you are already using direct deposit for your paycheck, have your financial institution transfer the amount each month. You can also have your employer deduct the amount each month and deposit into the account of your choice with a payroll deduction program. Ask your employer for the form to start now. Other Issues to Consider The size of your mortgage payment should only be one part of your mortgage decision making process. If "paying off" your mortgage or significantly reducing your total debt level is important, a shorter term fixed rate mortgage with a 20 or 15 year term may be right for you. If you plan to live in your home for only a short time (for example, five years or less), you may want to seriously consider an adjustable rate mortgage with an initial rate term that matches your moving plans. Balloon mortgages are usually less attractive than a similar term ARM. With a balloon mortgage, you will need to secure a new mortgage at the end of the term subjecting you to not only to changes in rates, but also the costs and process of getting that new mortgage. Be sure that you can afford your mortgage payments - both at the time you get it and in the event that you get an ARM and rates have risen when the initial rate period expires. Summary Choosing the mortgage that is right for you is critical. Consider what you want your mortgage to do for you. Factor in your plans for how long you anticipate needing the mortgage (how long you are going to live in the home) and be sure that you can accept the risk that your monthly payments may rise if you choose an adjustable rate or balloon mortgage.