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Weighing the Best Mortgage Options Right Now

By Jeff Brown, sbup

Mortgage rates have fallen close to the all-time lows set in January. The mortgage rate index shows 30-year fixed-rate mortgages average 5.15 percent, 15-year fixed loans 4.82 percent, and the one-year adjustable-rate loan 5.44 percent.

Which is the best choice?

For most people, the old-fashioned 30-year fixed loan is probably best today. But that’s not always so. As rates and other conditions change, the best option on one day may be the worst on another.

Here’s a brief primer on the different mortgage options out there, considering how the low rates might factor into your decision making.

The 30-year fixed loan: The interest rate is set when the loan is issued, and the rate and monthly payment never change. These loans are a terrific deal right now. At 5.15 percent, you would pay just $546 a month for every $100,000 you borrow, according to sbup’s mortgage loan calculator.

The 15-year fixed loan: The rate and payments also stay the same for the loan’s life. But because the principal – the sum you borrow – must be paid back twice as fast, this portion of the monthly payment has to be bigger. If the rate were the same 5.15 percent as the 30-year loan, the 15-year would charge $798 a month per $100,000 instead of $546 on the 30-year. At the 4.82 percent rate mentioned above, the payment would be $781.

The 15-year term means paying less interest over the life of the loan -- $40,660, compared to $96,567 on the 30-year.

If you can handle the bigger monthly payment, the 15-year seems like a better option, but that’s a big “if.” Also consider that the extra money used for payments on a 15-year deal might be put to better use – in an investment, for example. If you could get a 10 percent investment return, getting a 30-year loan and investing the monthly savings would be better than “earning” just 4.82 percent by reducing your interest charges with a 15-year deal.

One alternative is to get the 30-year fixed loan and make extra principal payments on your own. That way, you could pay the loan off early, saving a bundle in interest charges, but you would not be committed to the larger monthly payment of a 15-year loan. That flexibility could come in handy in tough times. You’d make a slight sacrifice, since the 30-year rate is a bit higher. Use the the mortgage loan calculator to explore the savings from extra payments.

The adjustable-rate loan: This loan isn’t very popular these days, partly because some of the more exotic varieties sparked the financial crisis. Aside from that, ARMs don’t offer a very good deal today

The typical one-year ARM charges an initial rate for 12 months, then adjusts every year as prevailing rates go up or down over a 30-year term. ARM resets are done by adding a “margin” – perhaps 2.75 percentage points – to an underling index, such as the yield on U.S. Treasury bonds with one year to maturity.

At a starting rate of 5.44 percent, there is too little up-front saving to offset the risk of higher rates later. Many ARMs allow rates to rise as much as 6 percentage points over the loan’s life, typically limiting annual changes – up or down – to 2 points. So today’s ARM could feasibly charge 11 percent someday.

True, resets also could reduce your future payments. But rates are so low today it seems more likely they’ll go up than down.

Whatever type of mortgage you prefer, be sure to shop around by entering your zip code at sbup’s mortgage search. You can find rates and offers from the small lenders, as well as the giants like Bank of America (Stock Quote: BAC), Wells Fargo (Stock Quote: WFC) and Citibank (Stock Quote: C).

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