Using a Mortgage to your Advantage

Choosing the Right Mortgage for Your Future

Choosing the right mortgage isn’t just about securing a loan – it’s locking in a commitment that will facilitate your homeownership and have a significant impact on your financial future. With so many options available, finding the best fit can feel overwhelming. Whether you’re a first-time buyer, a seasoned homeowner, or somewhere in between, this guide will help you think through how to fund your homeownership.

Refinance

For many homeowners, refinancing a mortgage can be a strategic financial move that unlocks savings, adds security, or provides cash for other purposes. One of the most common reasons to refinance is to reduce the interest rate. If a significantly lower rate is available, that could lead to lower monthly payments and substantial savings over the life of the loan.

Others may choose to refinance their mortgage to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan to assure a stable payment for the life of the loan. Alternatively, refinancing can provide access to home equity through a cash-out refinance, helping homeowners fund major expenses like home improvements, college tuition, or debt consolidation.

Refinancing isn’t always a good choice though. There are significant closing costs associated with refinancing, so unless the homeowner plans to stay in the house for two years or more, the benefits of any monthly savings may never make up for the up-front costs. Similarly, homeowners with an interest rate lower than the prevailing rates would not benefit from refinancing as that would just result in higher payments. Additionally, some homeowners might face prepayment penalties on their current mortgage or have insufficient equity, making refinancing either costly or unavailable altogether. It’s essential to evaluate these factors before deciding whether refinancing is something to consider.

New Home Purchase

When purchasing a new home, understanding the mortgage process is crucial to making financially sound decisions. One of the first considerations is the down payment—the upfront amount paid toward the home’s purchase price. While a typical mortgage requires a down payment of 20%, there are other options which may allow for lower down payments, such as FHA, VA, and USDA loans for eligible buyers. If a lower down payment is needed and those programs are not available, Private Mortgage Insurance (PMI) may be a good alternative. PMI can allow for a reduced down payment but requires the homeowner to pay a monthly premium to a third-party insurance company.

For either a refinance or a new home purchase, there are several variations of mortgages to consider:

• Fixed-rate mortgage: Locks in a given interest rate for the duration of the loan.
• Adjustable-rate mortgage (ARM): Locks in the interest rate temporarily, then adjusts based on prevailing interest rates at the time of reset. The benefit of an ARM is an interest rate that may be considerably lower than a fixed rate to start, which could make the home purchase affordable. The risk of an ARM is that if interest rates rise considerably, it could lead to a substantial increase in the monthly payment.

The other mortgage variation to consider is loan length:

• 30-year mortgage: The most common, with lower monthly payments.
• 15-year mortgage: Offers a slightly lower interest rate than the 30-year. The challenge with a mortgage of 15 years is a substantially higher monthly payment. If affordability is a concern, a 15-year mortgage would not be a good choice.

Beyond the down payment, the affordability of the monthly payment is an essential calculation. Mortgage payments typically include principal and interest, but homeowners should also account for additional costs like property taxes, homeowners’ insurance, and possibly Private Mortgage Insurance. Lenders use a debt-to-income (DTI) ratio to assess affordability, ensuring that monthly payments remain manageable compared to the buyer’s income.

While securing a lower interest rate can help reduce monthly costs, buyers should also factor in the cost of home maintenance and unexpected expenses of homeownership to make sure they are prepared for all financial responsibilities that come with homeownership.

Plan Carefully and Seek Advice

Ultimately, deciding the type of mortgage to select comes down to careful financial planning and a clear understanding of one’s overall financial situation. Consulting with a financial advisor or mortgage professional can help with these important decisions. Hopefully, the choices made lead to many years of enjoyment as fulfillment of the American dream of owning a home.

Looking for more information or to speak with an advisor? Our Financial Academy page has you covered! Find helpful resources to help you do your best work and live your best life.

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Investment advice offered through OneDigital Investment Advisors LLC.

Information is provided for educational and information purposes only.

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