How can you compare two different mortgages when you’re not sure which is best for you? Here are some great tips!
Step 1: State Your Mortgage Goal
First, state your mortgage goal. Mortgage goals are the objective criteria by which different mortgage options will be judged! For example, consider two home buyers – Frank and Alice. Frank wants to live in his home for the next 30 years. Alice, however, will live in her place only until she finishes college – about 4 or 5 years. Frank and Alice have similar, but not identical, mortgage goals.
- Frank’s Goal is to minimize mortgage cost over the 30-year life of his home loan.
- Alice’s goal: To minimize mortgage cost over the 4-year life of her home loan.
Step 2: Gather Your Mortgage Information
You need info about each mortgage option to assess how well it satisfies the mortgage goals. For the purpose of this example, we will assume that Frank and Alice are trying to choose between a fixed-rate mortgage and an adjustable-rate mortgage. The information on each mortgage appears in the table below.
| Fixed-Rate Mortgage | Adjustable-Rate Mortgage | ||
| Loan term: | 30 years | Loan term: | 30 years |
| Starting interest rate: | 7.5 percent | Starting interest rate: | 6.0 percent |
| Loan amount: | $250,000 | Loan amount: | $250,000 |
| Months before first rate adjustment: | 12 months | ||
| Periodic rate cap: | 0.5 percent | ||
| Maximum rate after adjustment: | 10 percent | ||
| Months between rate adjustments: | 12 months | ||
Additionally, each loan requires a $25,000 down payment and $3,000 in other costs and fees. Neither loan requires points.
Step 3: Assess Mortgage Performance
The key to mortgage analysis is assessing how well each mortgage option satisfies the home buyer’s mortgage goal. To conduct this assessment, Fred and Wilma use a mortgage calculator provided on their lender’s web site. This ensures they can get an accurate amoritzation schedule, or a good breakdown of all the monthly and annual costs of their mortgage options!
The amortization schedule shows that the adjustable-rate mortgage is the best choice for Alice. By choosing the adjustable-rate mortgage, Wilma will save nearly $15,000 when she pays off the mortgage after 4 years (48 months), because in an adjustable rate mortgage, rates on the mortgage go up after specified year brackets.
Frank, however, intends to live in his house for the full term of the mortgage – 30 years (360 months). Over that time period, the fixed-rate mortgage is the best choice. It will save Frank over $50,000.
