How To Choose The Right Mortgage For You

From a previous article,

We discussed what a mortgage was and the 2 most common types of mortgages, 15-year fixed and 30-year fixed. There are also several other, though less common, types of mortgages that exist which people use for a variety of reasons.

There is literally a buffet of mortgage types to choose from: adjustable-rate mortgages (ARM), balloon type mortgages, 20-year fixed mortgages and a host of others.

Choosing a Mortgage

Choosing the right mortgage is important because if you guess wrong, it could end up costing thousands of dollars in additional interest, slow down the path to financial independence, and even prevent achievement of financial goals.

How do I know this? Let’s just say I have some experience acquiring and refinancing mortgages.

Here’s My Story…..

Way back in 2000, I was fresh out of college and decided to establish roots in my current city. It was then that I decided that I wanted to own a home.

Owning my own home was something I wanted to do for a long time. To me, home ownership meant independence and my first real venture into adulthood. I wanted a place where I could decorate any way I wanted, paint any color I chose, and to be a place where I could put my feet up on the coffee table if I wanted to. It was mine and I loved it!

Back then I decided to go for the 30-year fixed mortgage. That way, I’d have a fixed payment and as my income grew, the payment burden would decrease. Back then interest rates were 8.25% which was a good rate for that time. It wasn’t too far in the past where my family remembered paying double-digit interest rates for a mortgage. My monthly mortgage payment was $1,350 a month.

A buddy of mine who was a mortgage broker taught me a lesson on mortgage interest rates. If the current rate was at least 1% less than the rate being paid on the mortgages, refinance. Your payment would go down a lot and if done right would not extend the duration of the mortgage that much.

Life was going well, and a funny thing happened, interest rates kept going down. This was a shocking situation since rates had been high for so long. A situation presented itself that I thought was too good to pass up.

About 18 months after I purchased my home, the rate on a 30-year fixed dropped to about 7%! I know compared to today’s rates that is very high but back then that was a 30+ year low! Following his advice, I decided to refinance my new home. My mortgage payment dropped over $150 / month and only extended my mortgage term by about a year. This was something I thought I could catch up on by making periodic extra payments. To me, it was not a big deal.

I thought I was living the high life! Had a great home, good friends, and a wonderful life. I couldn’t ask for more.

Then another funny thing happened a few years later. I moved onto a new job that was a huge pay bump! This job was, at the time, a dream job with an opportunity to move to the West Coast since this new startup company was setting up their global headquarters out there.

I heard thru the grapevine that I was in contention to be part of the new team leading out of the new corporate headquarters. I was blown away just at the thought of this new opportunity!

My thoughts then went to my home. What would happen to it? I had thought about selling it or turning it into a rental property if I was picked to move out west. I was thinking a rental property was a better choice since it gave me an option to move back to this city in case the new job did not work out. Plus, even though I loved my location, the house was small, and I was having thoughts about selling it anyway to upgrade to a bigger house.

At that time, my buddy, the mortgage broker, approached me with another opportunity.  There was a new type of loan he was working with he thought might fit my situation perfectly, a balloon mortgage.

His thinking was that since I was thinking about making this house a temporary rental while I figured out my new living situation, a balloon might be the way to go. Even if I moved back to live here, I wasn’t going to stay much longer in that house, maybe 5 years at the most. Even if I was renting it, I wasn’t going to own the house much past 5 years since I was planning to move across the country.

This new type of mortgage, a balloon mortgage, was offering interest rates at 5.5%! At the time, this rate was a 50+ year low and there were rumors rates were going to climb back up into the 8-9% range again.

Which Type of Mortgage Is Right For You

Moving to this new type of loan would save me another $150/month on my mortgage payment. Houses that were my size and in my area were renting for $1200-$1300 a month! At this rate, I could have the mortgage paid for plus add a few hundred dollars a month into my pocket.

As it turns out, I wasn’t picked to move out west. Oh well, still had a great job, good home, and wonderful friends. As Chris Farley in Tommy Boy says, “Yeah, I could settle for the Pizza Hut pizza in my trunk, but I REALLY wanted those chicken wings!” I didn’t get the chicken wings this time but did get the Pizza Hut pizza! Lol ha-ha! 😊

In the meantime, life was going great. I ended up dating this great girl for awhile and a few years later, we decided to get married!

We decided to continue living in this little house since we loved our neighbors and loved the area so much. The balloon mortgage was switching to a lump sum payment, so I had to refinance again. We decided to go with a 30-year fixed again to lower our payment as much as possible while we were a single income family and then make extra payments on the back end to catch up. The interest of 6% on this loan was only slightly higher than the balloon payment I just refinanced so I ended up saving another $50 or so a month on the mortgage.

Paying for the medical bills of an autistic child wasn’t easy and we needed that extra income right now to pay for the good doctors that were helping our son. We found out the hard way that the REALLY good doctors do not take insurance, so we ended up paying a lot out of pocket.

Life was humming along. I moved onto another new job that wasn’t what it was cracked up to be. My wife was still a stay-at-home mom when another great thing happened in our lives….. we were pregnant…..with twins!

Unfortunately, they both had health issues and we racked up a huge amount of debt over the next few years. We leveraged everything we had to pay for their medical bills except dipping into our 401K.

Using one of our last levers, we rolled a lot of their medical debt into the mortgage by refinancing again at 3.5%. This has been where we have been since.

So, when I say I have some experience with mortgages, you know what I’m talking about.

Based on my experience, alternative options to 15-year and 30-year mortgages can have useful benefits under the right circumstances. Let’s look at them next.

Balloon Mortgages

A balloon mortgage is a lump sum paid at the end of a mortgage’s term that is significantly larger than all the payments made before it.

Balloon payments allow the borrower to reduce the fixed payment amount in exchange for making a larger payment at the end of the mortgage term. Balloon mortgages require fixed monthly payments for several years. After that, you’ll pay the remaining principal balance at once.

Balloon Mortgage

With a balloon mortgage, the term is much shorter than the amortization period. To clarify, the term is the number of years the borrower has to repay the loan. The amortization period is the number of years over which the loan’s payment is calculated.

For example, a 30-year fixed rate mortgage has a 30-year term and 30-year amortization period. The borrower makes the same payment every month for 30 years and the loan is completely paid off.

By comparison, a balloon mortgage might have a 7-year term and a 30-year amortization period. The same payment is made every month for 7 years that you would have made with the 30-year term. At the end, you’ll owe all the remaining principal.

Balloon mortgages comes in a couple of different types. There is interest only mortgages where the borrower makes monthly interest payments and pay the entire principal at the end of the mortgage. There are principal and interest payments where a much smaller amount of the principal is paid each month than would be paid using a fixed mortgage. The result is that a smaller lump sum payment is due at the end of the term.

Should You Get A Balloon Mortgage?

Balloon mortgages are a good idea if you know with a high degree of certainty that you aren’t going to be in the same property when the balloon payment comes due. It could also be a good idea if, with a great deal of confidence, you are going to receive a lump sum payment equal or greater than the balloon payment before it comes due. Finally, a balloon mortgage might be a good idea if you are extremely confident you can either sell the house or refinance before the balloon payment is due.

Why Consider a Balloon Mortgage?

There are several pros and cons with balloon mortgages.


  • Lower interest Rate
  • Smaller Monthly Payments
  • Alternative to Conventional Financing


  • Overall costs could be higher in the long-term
  • Riskier than traditional loans
  • Refinancing might not be advantageous

At the end of the day, balloon mortgages are an option only under very specific scenarios. There may be better options available such as ARM mortgages.

ARM Mortgages

An adjustable-rate mortgage (ARM) is a home loan with an interest rate than can change over time. Typically, an ARM starts with a low fixed interest rate during an introductory period which could range anywhere between 3 – 10 years.

When the introductory period expires, the interest rate adjusts to current market rates. If rates are lower, your interest rate and mortgage payment could go down. If rates are higher, your interest rate and mortgage payment could go higher. ARM rates change periodically, either every 6 months or annually until you sell, refinance, or pay back the mortgage in full.

ARM Mortgages

There are 2 basic types of ARMs: interest-only ARM and hybrid ARM.

An interest only ARM (IO) gives you a specific number of years, usually between 3 and 10 years, during which only interest is paid on the mortgage. The payments stay low during the fixed-rate IO period. When the IO period ends, payments will increase, possibly a lot, because it will include both principal and interest.

A hybrid ARM has 2 phases: a fixed rate period ranging from 3 to 10 years followed by an adjustable phase. During the adjustable phase, the interest rate can move up or down depending on the index of market rates chosen by the lender. Here are a few examples of a hybrid ARM:

  • 3/1 ARM – The interest rate is fixed for 3 years and then adjusts annually.
  • 7/1 ARM – The interest rate is fixed for 7 years and then adjusts annually.
  • 10/6 ARM – The interest rate is fixed for 10 years and then adjusts every 6 months.

When Does An ARM Make Sense?

If you are planning on owning the house for a short period of time, an ARM might make sense. This might be a good idea for military families, ex-patriates, or doctors in a residency program.

An ARM might also be a good idea if expecting a financial windfall soon (i.e., insurance payout, inheritance, or trust fund payment). An ARM mortgage will allow smaller payment to be made until the home can be purchased free and clear.

An ARM might also be a good idea if anticipating mortgage rates to decrease. In today’s low interest rate environment, this is probably not going to happen. It’s risky especially if things don’t go as planned. If you cannot make the payments, you could lose your home.

Also keep in mind that some ARMs come with a prepayment penalty. This is a fee that can be charged if you sell your home or refinance. Ensure to check the clauses so this doesn’t happen to you.

When Is An ARM A Bad Idea?

An ARM is probably a bad idea if you plan to put down roots. If buying your forever home, a fixed rate mortgage is a better choice.

While the interest rate on a fixed mortgage may be initially higher, if you want a predictable payment, an ARM is not the way to go.

Finally, if your budget cannot potentially handle a larger mortgage payment, an ARM is probably not for you. Maybe you want to go back to school, maybe start a family, or possibly change careers. These life changes could affect your income in the years ahead. If not sure you can handle a larger mortgage payment, stick with a fixed rate mortgage.

Any Other Mortgage Choices?

I’m glad you asked! In today’s low interest rate environment, a lot of people want to take advantage of this and lock in the rate. They want to buy as big of a house as possible at the lowest possible rate.

What if they want to pay down their house quickly but are worried about having flexibility for unexpected emergencies? There are a lot more choices other than a 15-year or 30-year mortgage. Here are a few examples.

20-Year Mortgage

A relatively newer type and not well-known fixed rate mortgage is the 20-year mortgage. It’s sort of a hybrid between a 15-year and 30-year mortgage. The term is lower so the house can be paid off faster, yet the payment is lower than a 15-year mortgage.

Here is an example. Using Bankrate’s calculator, let’s compare the monthly payment of a $300,000 home using a 15-year, 20-year, and 30-year mortgage.

  • 15-year at 3.66% à $2,008
  • 20-year at 4% à $1,726
  • 30-year at 4.33% à1,463

The difference between a 15-year and 30-year mortgage is $545. This is huge! Using a 20-year mortgage, the difference is more palpable at $282. While the payment for a 20-year mortgage is higher than a 30-year mortgage, you will pay less in interest and still have some financial flexibility to boot.

Here is another option:

Make Extra Payments

Another way to pay down the mortgage faster and still have maximum flexibility is to get a 30-year mortgage and then make 1 additional mortgage payment a year.

On average, this strategy of 1 additional monthly payment a year will reduce your overall mortgage term by approximately 3-5 years depending on the size of the mortgage. Keep in mind that this is 3-5 years per additional payment.

If you make 2 additional monthly payments a year, the mortgage term is reduced by 7-10 years! By just paying a little extra each year when you can has a HUGE impact on the mortgage payment schedule.

Want more choices? Here you go…..

Pay Off 30-Year Mortgage Like a 15-Year Mortgage

Want to maximize flexibility for life’s changes and give yourself a buffer in case emergencies come up? Try this on for size.

Purchase a 30-year mortgage and then pay it off like you received a 15-year mortgage. This gives you the ability to speed up payments on your schedule. You can choose to payoff the 30-year mortgage early.

To do this, ensure your 30-year mortgage does not have prepayment penalties. Then, calculate what a 15-year mortgage payment would be and make it your monthly payment. This will reduce the principal faster and save a ton if interest. Plus, it leaves you a way out in case money tightens later on down the line. You just pay the 30-year monthly payment if money gets tight.

You can move between the 2 payments without ever having to refinance which save thousands of dollars in closing costs.

Using this method, you can set your mortgage term to any timeframe you want. It could be a 10-year, 15-year, 20-year, even 25-year mortgage. Just think of the possibilities!

Choices, Choices, Choices

We have reviewed several mortgage choices today. There is a plethora of choices to use depending on the situation you are in.

In this low-rate environment and with long-term inflation looming on the horizon, IMO, you can’t go wrong with a 30-year mortgage. If you want to pay it off faster just make extra payments. If finances become tight and cannot afford the extra payments, just pay the minimum 30-year mortgage payment and life is good.

What Type of Mortgage To Choose

It provides the flexibility to optimally manage your finances and juggle all the aspects of your life.

There is nothing wrong with balloon or ARM mortgages, it just needs to be for the right life situation. Your job is to make sure the mortgage picked meets your lifestyle and needs both now and in the future. Otherwise, you’ll have to refinance and those costs thousands of dollars each time it is done.

Until next time……

Live The Life You Love, Want, and Deserve 😊