What Mortgage Term is For You?

The fact that mortgage calculators are free and online makes them enormously appealing. The big payoff that comes with using a mortgage calculator is that you can compare home loans by calculating your monthly payment. There is, however, more to a monthly payment than meets the eye. You also need to have a solid understanding of which mortgage term is right for you before you start working with the numbers. Loan terms primarily fall into the following general categories:

1. Fixed-rate loans: These home mortgages have a fixed rate during the entire term of the loan. A 30-year fixed rate loan, for example, carries the same rate throughout the entire 30-year life of the loan.

2. Adjustable rate mortgages (ARMs): ARMs come in varying terms, and tend to have a teaser rate that can adjust on an annual basis. For example, a "5/1-year" ARM includes a five-year introductory rate, followed by a rate adjustment every year, based on current market conditions.

3. Two-step mortgages: These loans have an introductory rate, which then adjusts one time. A 7/23 two-step mortgage means that there's a 7-year introductory rate, followed by one adjustment that will remain in effect for the remaining 23 years of the mortgage.

4. Balloon mortgages: A low introductory rate, generally for a 7-year period, attracts people to this loan. But the buyer should be aware that at the end of the loan, the entire balance of the mortgage is due at once.

A fixed-rate term works better for people who plan on staying in their home for long periods of time. Conversely, mortgages with adjustable rates or balloons are a better option for people who plan to move or refinance before the end of the teaser rate.

A mortgage calculator can help you calculate your monthly payments for any of these loan programs. They can also help you with other mortgage items, including amortization and calculating interest only payments. Be sure to use this valuable tool when deciding on the term that's right for you. It's fast, free, and a whole lot easier than trying to count up long-term interest using your fingers.