How to Pick the Right Mortgage

Let's say you're ready to refinance your mortgage. But what type of loan is best for you?

Borrowers often assume that a 30-year fixed mortgage is the way to go in most cases. That's not true for everyone, however.

Depending on your circumstances and the current available rates, you could save a significant amount of money by considering different loan terms.

Deciding Between Fixed-Rate and Adjustable-Rate Mortgages

A common argument during the real estate run-up went like this: Since you're only planning on staying in the house for three years, why not take a three-year adjustable-rate loan? The initial rate is lower, and will stay that way for three years. You'll be out of there before the rate resets. Besides, if you change your mind, you can always refinance.

Or so the argument went.

As we are now seeing, such advice can go awry. Depending on where you live, you can't always refinance and you can't always sell at a price that you expect. The drop in home prices has made both options very difficult for many people.

The following chart of current national averages shows that mortgage rates remain at relatively low levels, and there's not much of a short-term advantage in taking an adjustable mortgage right now.

By taking a fixed-rate loan, you may pay a bit more if rates head lower, but you will have less risk. If rates go very high, a borrower with an adjustable-rate mortgage may face a maximum-allowed rate (the "cap") of over 10% on an adjustable-rate mortgage, based on today's rates.

Pay Off the Mortgage and Save Money on Interest

One of the most common fallacies floating around during the real estate run-up was "you have nothing to gain by paying off your mortgage. You're better off using that money for something else."

This argument makes no financial sense, especially when you consider that "something else" may not be an investment paying more than you pay on your mortgage. The "something else" just might be a $50,000 pickup truck that you use as a car, or a high-definition TV.

Unless you're an investing ace, you're probably best served paying off your mortgage as quickly as possible.

Having your home paid off is a wonderful prospect. It will make it much easier to consider retirement or to buy another home down the line.

The following example illustrates how much you can save on interest payments when you compare 15- and 30-year rates for a $200,000 mortgage.

Click here for larger image.

In the above example, you could save more than $135,000 in interest by choosing the 15-year fixed loan instead of a 30-year loan. The monthly loan payment, of course, is $447 higher for the 15-year loan, which may be too much to swallow. Still, this is something to consider.

If you are looking to buy a home, you might look for a less expensive one to help you afford a shorter loan term and save a ton of money on interest. Fifteen years can make quite a difference. If you buy a home at the age of 40, isn't it better to be paid off when you're 55, rather than 70?

You're Not Stuck With Just a 15-year or 30-Year Mortgage

You can use BankingMyWay's Fixed Mortgage Loan Calculator to consider many different scenarios. The calculator allows you to consider other terms, such as 20 or 25 years, which would lower the payment a bit from a 15-year mortgage.

The calculator also illustrates how much of your principal balance will be paid down, year by year. It also shows how much faster you can pay off the loan, and how much more you can save on interest, if you make extra principal payments monthly or annually.

Refinancing is a popular topic right now, with the Federal Reserve's interest-rate cuts and the need for so many people to avoid nasty payment resets on adjustable-rate mortgages.

Many of the largest lenders have added Web site features to speed up the process:

• Bank of America (BAC Quote) can prequalify you online in 10 minutes. Citibank (part of Citigroup(C Quote)) also takes online applications.

• Washington Mutual (WM Quote) and Chase (held by JPMorgan Chase (JPM Quote)) have online features that display available rates based on the criteria you enter.

• IndyMac Bank (IMB Quote) has a similar online tool that also compares the offered rates to industry benchmarks.

• Countrywide(CW Quote) offers to provide and lock in a rate for you over the phone.