Understand Your Finances
The anatomy of choosing a mortgage
How to pick the mortgage that best suits you
The following article is part of "The Anatomy of..." —a Chase series that demystifies seemingly complex financial concepts and terms. This article is presented by Chase Home Lending.
When buying a home, choosing a mortgage to pay for it is a critical part of the process. But which one is right for you, one with a more stable or variable interest rate?
First, let's start with basics:
The down payment
You typically pay 3 to 20 percent of the purchase price at closing in what's called a down payment.
Then you borrow the remaining amount—called the principal—from a bank.
You repay the principal through monthly payments usually over 20 or 30 years. Each monthly payment includes a portion for interest, which is the cost of borrowing the money, and a portion for principal. The interest is greater than the principal early in the mortgage, but goes down over time.
The monthly payment may also include money your bank sets aside to pay your property taxes and homeowners insurance.
The fixed-rate mortgage
The most common type of home loan is the fixed-rate mortgage because the interest rate remains the same for the life of the loan. Fixed-rate mortgages usually last 30 years, though 15 and 20-year loans also are common.
Your monthly payment stays the same with a fixed-rate mortgage, which makes it a great option if you plan to be in your home for many years, especially if interest rates rise. You may pay a slightly higher interest rate on a fixed-rate mortgage than an adjustable-rate mortgage because your interest rate is capped.
The adjustable-rate mortgage
The interest rate on an adjustable-rate mortgage (ARM) can change periodically, moving your monthly payments up or down with it. An ARM could work well if you plan to own your home for a shorter period of time. You can take advantage of rates lower than fixed rates, and be long gone when rates move up.
For ARMs, you can also choose from a fixed interest rate for 5, 7 or 10 years, which becomes variable for the remaining years on a 30-year loan, adjusting every year thereafter.
For example, a 5/1 ARM would have a fixed interest rate for the first five years and then convert to an adjustable rate, with annual adjustments for the remaining 25 years of the 30-year loan.
Talk to your home lending advisor to determine the right mortgage for you.
Disclosure: For Adjustable Fixed Mortgages, the interest rate may be adjusted annually after the initial fixed period based on an index and a margin. The APR May increase after loan consummation. For down payments less than 20 percent on conventional loans, mortgage insurance may be required and PMI charges may apply. All home lending products are subject to credit and property approval. Rates, program terms and conditions are subject to change without notice. Not all products are available in all states or for all loan amounts. Other restrictions and limitations apply. Home lending products offered by JPMorgan Chase Bank, N.A. ©2017 JPMorgan Chase &Co.
Pauline Millard is a Chase News contributor. Her work has appeared in The Associated Press, LearnVest and The Muse.