More than likely, the largest purchase that you will ever make is when you purchase your house. It goes to follow that the largest debt you will incur will be your mortgage, and making the right decision about your mortgage will be the most important financial decision you will ever make. Your lender will make recommendations about the best loan for your specific circumstances, however the final decision rests with you and it is best to have at least some basic information to ensure that you are making an informed decision.  

The ideal mortgage is the one where you can afford the payments for as long as you plan to keep the home. The payments vary with the different types of mortgages. The two most common types of mortgages are fixed-rate and adjustable-rate mortgages (ARM). A fixed-rate mortgage is constant for the length of the loan, usually 30, years although there are shorter terms available. Short-term fixed-rate mortgages, typically 15- or 20-years, usually carry lower interest rates; higher payments and less money paid out than with a longer-term loan. Long-term fixed-rate mortgages usually have smaller monthly payments. ARMs initially come with rates lower than a fixed rate mortgage, but can and do rise or fall depending on economic factors. Its lower initial rate may help you qualify for a larger loan, however, your payments may rise substantially if interest rates skyrocket. If you know your income will rise to keep pace with an ARM's periodic adjustment or you plan to move in a few years, an ARM could be a good choice. There is another less common type of mortgage that is used called an interest-only mortgage. With this type of loan you typically make payments on the interest only for a set period of time and then are required to begin paying interest at the end of the set term. Typical, the interest-only period of the loan ranges from three to seven years, with the interest rate fixed for the interest-only period of the loan. Once it is time to begin paying interest on the loan, the rate becomes an adjustable rate. The only drawback to this option is that you are not paying down any principal during the interest-only portion of your loan. 

Most lenders have developed some interesting twists on these conventional type mortgages. They have realized that not everyone can fit the cookie cutter mold of conventional financing. One interesting variation is known as the 80/20 (also 80/10/10 or 80/15/5), also known as piggyback financing or combination financing. These loans allow buyers to use conforming loans (under $333,700, this level is set by Congress) without having to jump into a Jumbo loan by using a first and second trust. The first trust is set at 80% to avoid the need for Private Mortgage Insurance (PMI). The second is 20% of the purchase or value. This is allows homebuyers to get into a home with little to no out-of-pocket expenses. 

Another effective way to get into a home without using your own funds for a down payment are programs like AmeriDream. These programs allow you to get into a home without any out of pocket expense, or the minimal 3% closing costs. The AmeriDream program is not really a mortgage option, but assistance with your down payment or closing costs. It is used in conjunction with a FHA insured loan. To qualify buyers must buy a home enrolled in the AmeriDream down payment gift program and qualify for a mortgage through FHA. AmeriDream's down payment assistance is provided directly to the homebuyer in the form of Gift Funds, which are wired to the Settlement/Closing Agent on the day of the settlement/closing. The gift will be up to 5% of the home's purchase price and can be used for the down payment and/or closing costs. This assistance allows buyers with little or no cash to purchase a home they would not otherwise be able to. Everyday lenders are coming up with new and creative ways to allow buyers to live the American Dream of owning their own home. For other options that may come available talk to your lender or a knowledgeable real estate agent. It is important to work with a knowledgeable real estate agent when working with these programs to make sure the process runs smoothly and as planned. 

Below is a quick reference chart for you to use. 

Fixed Rate 

Pros:  

· Monthly payments are set and easier to budget
· More stable if you plan to be in your home for a long time
· If interest rates rise, yours remains the same  

Cons: 

· If interest rates drop, yours remains the same  

Adjustable Rate 

Pros: 

· Lower initial payments
· Best if you plan to move or sell the home soon
· The rate is fixed during adjustment period
· If interest rates fall, your rate falls too
· May allow you to qualify for a larger loan.  

Cons: 

· Less long-term stability
· After the adjustment period, interest rates usually rise 

Interest Only 

Pros: 

· Lower initial payments
· Qualify for a more expensive home 

Cons: 

· You are not paying down the principal of your mortgage
· Interest rates can skyrocket after the set interest-only term 

80/20 

Pros: 

· Your entire payment is tax deductible (mortgage insurance is not)
· You can pay off your second early to reduce your payments and increase your equity 

Cons: 

· The second trust may have prepayment penalties
· Depending on your rate, your total payments may be higher