Searching for the Best Home Loan

by Gabby Hyman
HomeOwnerNet Columnist

There's nothing like looking at innovations in style and design at a home and garden show to get people thinking about purchasing a new house. Perhaps you've outgrown your current home, or simply want a new house with the latest energy-efficient doors, windows, and appliances. Now that you have the momentum, let's examine the most important considerations when shopping for a new home loan.One of the first things to consider when purchasing a home is how long you intend to live in it. Many people take out home loans and move before their property can appreciate in value, or before they make a substantial contribution to paying down the principal on the mortgage. While you may find an attractive initially low mortgage rate, you'll do better to establish ownership that works for you in the long run.

In looking over the two major home loan packages -- fixed rate and adjustable rate mortgages (ARM) -- you should have a good idea how long you're going to be there. If you'll own the house for at least ten years, the best fixed-rate mortgage can greatly help your long-term financial planning and lend stability.

On the other hand, if you plan on moving out of the new home to purchase another, then an ARM may provide the lowest mortgage rate during the three to six years you'll be in the house. ARMs, while adjusting upwards as often as every 12 months following the initial fixed period, typically offer lower interest rates than fixed-rate mortgages during the first few years.

Interest-only loans can be combined with ARM hybrids to create initial low payments and free up cash for other debt or home improvements. But it can be risky when the principal comes due.

A Good Mortgage Rule of Thumb

Lenders and real estate agents frequently talk about the so-called 28/36 percent rule of thumb when considering your mortgage and interest rates. That means that, typically speaking, your total monthly income should be high enough that you can devote up to 28 percent of it toward your house payments. And when you add up your total debt (high-interest credit cards, school loans, car payments, etc.) you should not plan on spending more than 36 percent of your total income on outstanding debt and mortgage combined.

Of course, lenders may be happy to take some risks (even as high as 50 or 60 percent of your income) if your credit history is solid, you have good prospects for job advancement, and you already hold some assets.

About the Author
Gabby Hyman has created online strategies and written content for Fortune 500 companies including eToys, GoTo.com, Siebel Systems, Microsoft Encarta, Avaya, and Nissan UK.

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