Terms, Rates, Points, Down Payments

Terms

Lenders want to give their customers choices. After all, every borrower has a unique situation. That doesn’t make choosing any easier for you, though, because there’s a lot to consider.

For fixed-rate mortgages alone, you could choose a term of 10, 15, 20, or 30 years to pay back your loan. Some banks even offer oddball terms, like 17-year and 25-year loans.

You could go with any of these, but if you want a standard mortgage, 15 or 30 years is where you want to be. Thirty-year terms account for most mortgage loans, with 15-year loans a close second.

As you make your pick, remember that different loan terms can make for very different loan experiences.

A 30-year loan will have lower payments but a higher interest rate, costing more over the life of the loan. On the flip side, a 15-year loan will have higher payments paired with a lower rate, saving you money over time.

If 15 or 30 years doesn’t feel right, it might be time to investigate one of those other options.

Rates

You don’t have quite as many options when choosing interest rates — in fact, a lot of the choosing is done for you based on your credit score and borrower profile. Still, a few things to consider.

Those 15- and 30-year fixed-rate loan terms will have noticeably different rates, with the 15-year option having the lower rate. The choice here depends on whether you want — or need — a lower monthly payment, with some consideration for how much interest the longer loan will cost you.

Adjustable rate mortgages (ARMs) are also something to consider. They can be risky — and aren’t for everyone — but introductory rates are typically much lower than either 15- or 30-year fixed loans. If you’re savvy with finances and don’t plan to keep the mortgage past the first rate adjustment, this might be the option for you.

Points

If you choose to go with that 30-year fixed-rate loan, but aren’t happy with the interest rate you get, can you do anything about it? Definitely.

Mortgage discount points are yet another option to consider in your loan choice. If you have extra cash, you can buy down your interest rate — making your “just okay” loan option a “more than okay” loan option.

The cost of each discount point is equal to one percent of your loan size, while a percentage point of your loan size is usually around 0.25% off your interest rate, though the value isn’t standardized and varies by lender and loan program.

The key question is: Will it be worth the cost?

There’s a break-even point down the line, usually five or more years into your loan, where buying down your rate starts saving you significant interest. However, if you sell or refinance before then, you won’t realize the full savings.

The discount points investment makes sense if you plan to keep your home long term. Otherwise, not so much.

Down Payments

Yet another choice — how big a down payment you can make on your new home — has a big impact, affecting your interest rate, monthly payment, even what loan programs you’re eligible for.

Down payments can range from as little as 3.5% to more than 20%. What will these buy you?

With a 3.5% down payment, you can get a Federal Housing Administration (FHA) loan, a government-backed loan that’s become increasingly popular since the 2008 recession. These loans must meet FHA maximum loan limits set by county.

With a 5% down payment, you’ll be eligible for Freddie Mac and Fannie Mae conforming loans.

With conventional loans, lenders still prefer a down payment of 10–20%, while for jumbo loans — loans in excess of the $484,350 limit in most places — a down payment of 20–35% may be necessary.

As you can see, you can’t really make any of these decisions in a vacuum. Each choice affects the other choices.

The best approach? Work out how real, concrete options you’ve been approved for will meet your mortgage needs.