What is the best mortgage for a first time home buyer who wants the
lowest monthly mortgage payment? Why

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Clarification of Question by curiousgeorgie-ga on 30 Jul 2004 20:12 PDT

I am trying to plan for my finances for the next five years or so. I
might sell this house (or townhouse) then.

I  want to  to continue to save towards retirement and not be chained
to a mortgage, I am looking for a mortgage with a low monthly payment
so I have money for other things.

I can probably put down between 10-15% on a $250,000 house. (If I can find one....)

Thank you all for taking the time to help.

Several things to consider. Your current finances, financial status,
how long you will stay in the house, etc. Being that mortgage rates
are really low right now even though the Feds had a rate increase, my
guess is that rates will not remain this low. If you choose a 15 or 20
year mortgage, obviously your monthly payment will be higher, but you
will save thousands of dollars. If you choose some type of ARM
(Adjustable Rate Mortgage) you open yourself up to the possibility of
a rate hike although you may save money initially. This is pretty much
a gamble. I would think your best bet is a 30 year fixed. This way you
lock yourself in to a great rate. Although the interest you will be
paying will be a larger amount because it is 30 years. Your mortgage
will certainly be much more affordable. If you are able to pay more
than consider paying the 30 year mortgage bi-weekly. This will reduce
the actually length of the loan from 30 years to approx 22.5 years.
Basically, unless you are absolutely sure you can afford a higher
mortgage, go for the 30 year fixed. Lock yourself in to an awesome
rate and pay more when you can to help offset the interest over 30
years. Whatever you may decide, speak to a professional to get all of
the information you can, it can never hurt.

Another possibility, if you foresee being able to eventually put more
money towards payments in the near future (within three years or so)
is an interest-only loan. In these loans, you are only obligated to
pay the interest every month for some period (the examples I've seen
are three years). If you do pay more than the interest, the rate is
re-amortized to account for the new principal.

This may be useful if you need low payments now but know that you will
be able to pay more in the future; however, you need to remember that
in such a situation you are not gaining any equity or making any
headway against your debt if you pay only the interest.

I know that Quicken Loans (www.quickenloans.com) offers interest-only
loans, and there are other lenders out there who do so as well.

Adjustable Rate Mortgages may also suit your needs, as category7
mentioned. The monthly payments would be somewhat higher than an
interest-only loan, but the percentage rates on ARMs are quite good,
and you will be building equity as you pay off. You do need to contend
with the fact that your rate WILL go up in some number of years.

Good luck,
smudgy.

If you could add a clarification to your quesiton it may help.

Some questions you might consider

1. How much you are going to put down?  How much you put down will
lower your payment.  Example.  Let's say you are going to put down 50%
of the sales price, well then maybe a 15 year loan would be the way to
go..

2. How much of a payment can you afford.  

3. Do you want to live there for 30 years or is this a starter home? 
(Starter home you may keep 5 years before moving up)

4. Do you want a Force Savings account using your home?  (10 year loan
will have high payments forcing you to pay down the mortgage faster-
force saving account)

Good luck

Also remember there is nothing to say you can't take a 30 year loan
and as your budget allows make extra payments to apply towards the
principal of the loan.  The lender has to charge you interest on the
prinicipal and so if you are paying the principal down then you are
paying less interest in the long run.  The advantage of this scheme is
that you control the payments beyond the usual amount for a 30 year
fixed.  So if something unexpected happens you can just pay the
regular mortgage payment amount.

Then you effectively can have the option of a shorter payment period
by paying additional principal as you go along.  Just make sure on the
extra check you send in to write "apply to principal" in the memo
field of the check.

The absolute lowest payments might be for an "interest only" mortgage.