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Choosing the right mortgage

Only a very small percentage of people are able to purchase a home without financial assistance. As a result, you will have to take out a mortgage loan to help pay for your house. But, which mortgage is best for you?

CNN/Money senior writer, Jeanne Sahadi tries to answer this question in her article, “Choosing the best mortgage now.”

Sahadi explains that the best way to find the perfect mortgage is to ask yourself the right questions.

The first thing you should decide is if you would prefer a 15-year mortgage or a 30-year mortgage.

“The first question you should ask is, ‘How much can I afford to pay on a monthly basis?’ Keep in mind, your mortgage payment is only part of what you'll pay to live in your home. You also should budget for furniture, your house's upkeep and the general expenses of life (like, say, food).”

A 15-year mortgage will have a higher monthly payment, but a lower interest rate meaning you will pay off your loan in a shorter amount of time.

Conversely, a 30-year mortgage will have a lower monthly payment with a higher interest rate, thus it will take twice as long to pay off the life of the loan.

“‘For most home buyers, especially first-time buyers, taking a 15-year (or 20-year) mortgage is out of the question,’ said Keith Gumbinger, vice president for mortgage tracker HSH Associates. The higher monthly payments are often too much to handle for these types of buyers.”

Home buyers with sufficient income will ideally want to take out a 15-year mortgage because you pay it off in half the time and you eventually save money.

“The second question you should ask is, ‘How long will you be in the house?’ You probably can't answer with absolute certainty, but you can play the odds.”

The reason you should ask yourself this is because you will want to determine whether to get a fixed-rate or adjustable-rate mortgage.

“Say, for example, you're single and buying a small condo but you can easily envision yourself married; or you've just started a family and plan to expand it at some point. Chances are good you'll want to trade up to a new home in five to seven years. On the other hand, maybe you've had your family and want to settle into a place with a good school system, which your kids will be using for the next 12 years.”

If you plan on staying in the home for over ten years, you should get a fixed-rate mortgage; it will probably be cheaper over the life of the loan.

If you plan on living in the residence for only a couple of years, an adjustable-rate mortgage will best suit you because you will pay less up front.

Essentially, an adjustable-rate mortgage is a fixed-rate mortgage for about five years and then it adjusts; ebbs and flows, according to the national interest rates.
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