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So Many Mortgage Loan Options! What's Best?

Dear Dr. Don,

I'm planning to buy a house. Which is the best mortgage loan option?

Thanks,

-Johnny Judgment

Dear Johnny,

Start out by asking yourself how much house you can comfortably afford, given your income and what you have available for a down payment. Bankrate's "How much house can you afford?" calculator will help you answer that question.

If you don't have much money for a down payment, then you'll want to look into Federal Housing Administration, or FHA, loans. This mortgage option allows you to get a loan with just a 3.5% down payment. Veterans can follow a similar path with a Veterans Affairs mortgage.

Conventional financing requires private mortgage insurance if the loan-to-value is greater than 80%. That means you'd need to make a 20% down payment to avoid PMI. Paying PMI isn't the end of the world, but it is an added monthly expense in the early years of a mortgage. PMI typically goes away over time as you pay down your mortgage and build equity in your home.

If you plan on being in the home for a relatively short time, there's another mortgage loan option to consider. I'd suggest a hybrid loan that roughly matches the time you expect to be in the home. A 5/1 adjustable-rate mortgage has a fixed rate for the first five years, and then the interest rate resets annually. As I write this, Bankrate's national average for a 5/1 ARM is 2.72%, versus a 3.57% rate for a conventional 30-year fixed-rate mortgage. Don't lock into a 30-year rate if you expect to be a short-timer in the loan.

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Bank Rates

Loan Type Graph Rate +/- Last Week
30 Y Fixed Graph 3.90% dw 4.01%  
15 Y Fixed Graph 3.01% dw 3.13%  
30 Y Fixed Jumbo Graph 4.29% up 4.27%  
5/1 ARM Graph 3.19% dw 3.26%  
5/1 Jumbo ARM Graph 3.85% up 3.84%  
Loan Type Graph Rate +/- Last Week
$30K HELOC Graph 4.37% dw 4.38%  
$50K HELOC Graph 4.07% up 4.06%  
$30K Loan Graph 4.64% up 4.63%  
$50K Loan Graph 4.25% -- 4.25%  
$75K Loan Graph 4.25% -- 4.25%  
Loan Type Graph Rate +/- Last Week
36 M New Graph 3.07% up 3.06%  
36 M Used Graph 3.29% up 3.28%  
48 M New Graph 3.06% up 3.04%  
48 M Used Graph 2.95% dw 2.96%  
60 M New Graph 3.13% up 3.12%  
Loan Type Graph Yield +/- Last Week
6 month Graph 0.39% -- 0.39%  
1 yr Graph 0.63% up 0.62%  
5 yr Graph 1.48% dw 1.51%