Buying a new home can be overwhelming, especially with so many mortgage options. How can you know a mortgage is the right one for your situation?

Learn the difference between the various mortgage loans and do your homework by using a mortgage calculator before making one of the most important financial decisions of your life.

No matter which mortgage option you choose, using a mortgage calculator can help you determine what you can afford based on interest rates and terms. Use a mortgage calculator first before applying for any loan.

The fixed rate mortgage for 30 years is well known because it’s the traditional mortgage. It could be to your advantage to accept a slightly higher interest rate with this type of loan because that rate will never change over the course of three decades.

If you plan to buy a home and live in it for the rest of your life, the 30-year option for a fixed rate mortgage is your best choice. It comes with the lowest payments every month of any fixed rate loan and you can be confident that your interest rate will never increase.

You will pay more total interest on a 30-year loan simply because of the length of time you have to pay it off, but there are other fixed rate options.

A 15-year or even 20-year fixed rate mortgage lets you pay off the loan in half the time of a traditional 30-year mortgage. This is ideal for anyone 20 years out from retiring.

The downside is that monthly payments will be higher, but you will save money in interest. If you have a steady income and can handle payment increases, an adjustable-rate mortgage can save you even more money.

Adjustable-rate mortgages (ARMs) give borrowers the advantage of very low payments at first. Just beware that the economic climate may drive up the cost of your payments at any time, which could put you at risk of foreclosure.

Bi-weekly mortgages have become quite popular. These allow borrowers to make payments once every two weeks instead of monthly.

Since paying bi-weekly results in making 26 payments a year, that adds up to one extra payment a year more than traditional loans.

The self-employed should look into no-documentation or low-documentation loans. You will end up paying a higher interest rate than traditional mortgages, but you don’t have to produce a pay stub or employer references.

Balloon mortgages are ideal if you only plan on staying in your home for a few years. These loans have a specified term in which you make payments similar to that of a 30-year mortgage. At the end of that term, however, the outstanding balance is due in full.

Balloon mortgages are perfect if you plan to sell or refinance the home after four to seven years, depending on the loan term.

Veterans or active duty military can take advantage of VA loans. These require no down payment and are extended solely to past and present military servicemen and women.

A newer option is the Reverse Annuity Mortgage (RAM), which was designed for older homeowners and retirees who are living on fixed incomes, although these are only used if the homeowner has built up equity in their home.

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This entry was posted on Friday, September 16th, 2011 at 8:08 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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