Do you want a fixed- or adjustable-rate mortgage? A fixed-rate mortgage is typically a good choice for homeowners planning to stay in their home for many years. The fixed rate means a fixed mortgage payment, which makes it easier to budget for other expenses. Adjustable-rate mortgages (ARMs) generally offer lower initial rates than fixed-rate mortgages, but the interest rate changes periodically based on a designated index. ARMs are typically popular with homeowners with rising incomes, who plan to move in a short time, or who want the short-term cash flow benefits from lower interest rates. Make sure you understand how the interest rate can increase. It’s desirable to have two sets of caps, one that prohibits the rate from rising more than 2% per year and another that prohibits the rate from increasing more than 5% to 6% over the loan’s term. Lately, due to historically low mortgage rates, many homeowners have been selecting fixed-rate mortgages. However, if rates increase, ARMs will probably become more popular again. If you are uncertain about which option to choose, consider convertible mortgages. These mortgages allow you to switch from an ARM to a fixed rate, from a fixed rate to an ARM, or from the original fixed rate to a lower rate if rates decline. There is typically a charge for this conversion privilege.

What mortgage term should you select? The most common mortgage terms are 15 and 30 years, although other terms can often be negotiated with the lender. Thirty-year loans have lower monthly payments, but your equity builds slowly during the loan’s early years. Monthly payments for 15-year loans are typically 15% to 25% higher than 30-year loans, but your interest costs are less than half since the mortgage is paid off so much sooner. Interest rates on 15-year loans are typically lower than on 30-year loans. Another popular option is the biweekly option. You pay half the monthly payment every two weeks — over the course of a year that equals 13 monthly installments. That builds equity quicker while reducing interest costs.

Should you opt for a lower interest rate or fewer points? A point is 1% of the mortgage face amount and is paid to the lender at closing. Points for a home’s original financing can be deducted on your tax return in the year paid. Often, you can lower the loan’s interest rate by paying more points. The longer you intend to live in the home, the more financial sense it makes to pay more points now for a lower interest rate over the long term. Sometimes it can be difficult to decide among several options with varying interest rates and points. As a simple rule of thumb, divide the number of points by the number of years you expect to live in the home. That fraction can be added to the loan’s interest rate so mortgages can be compared on a fairly uniform basis.

Sorting through all the options and choices can seem overwhelming. However, it is not uncommon to save thousands of dollars over the life of the loan by shopping for the best option.