What Type of Mortgage Should I Get?

As you are searching for your home or taking care of your financial situation, let’s discuss what type of mortgage you should get once you’re ready.

Rule #1: If you can’t afford a standard 30 year mortgage, you shouldn’t buy the home.

Let me put that more snottily: If you want to live in a $300,000 house, you should be able to afford a standard $300,000 house payment.

Many of my readers have had financial struggles or are just trying to get ready to buy their first home and want to make sure they do it right. Trust me when I say that doing it right means buying what you can afford now, and not relying on your financial situation or the market loan conditions improving in the future. (If things do improve – great! Just don’t bet the farm on it.)

People are losing their homes now because they used risky loan products to buy a home they really couldn’t afford and they hoped that values would go up, their incomes would double, or rates would drop. None of these hopes were guarantees and when they didn’t happen, the foreclosure roles increased and many credit and financial situations were ruined.

Rule #2: Get a fixed rate for as long as you plan on staying in the home.

The “standard” fixed rate loan is for 30 years, and this is by far the most common type of loan being done today. But if you are very confident that you will only stay in your new home for a short period of time, then check out the adjustable rate loans that start out fixed.

For example, if you know you won’t stay in the home for more than 3 years, then you can get a loan where the rate stays fixed for 3 years or 5 years before it starts adjusting. If the rate for these 3/1 or 5/1 loans is less than the 30 year fixed loans, then they may work for you. But you need to be pretty certain that you will indeed be moving before your rate starts adjusting or else you should just get the 30 year fixed loan.

Rule #3: Prepaying your mortgage is usually a bad investment.

There are many programs and schemes that encourage you to pay extra towards your mortgage each month to pay it off early – saving your thousands in interest over the life of the loan.

But this “extra” money is usually better utilized by investing in your retirement. You should easily be able to earn a higher rate of return over the long run by investing in the financial markets or buying more properties than you can by eliminating mortgage debt. Plus, all that interest you are eliminating from your mortgage is no longer tax deductible, so you miss out on the biggest government subsidy there is.

So, max out your 401K’s and IRA’s and college savings plans and buy some investment properties before even considering prepaying mortgage debt. And I mean, don’t even round up to the nearest $100. Save, save, save, invest, and save some more. Don’t get caught with zero mortgage balance and zero savings.

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