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Did you know?
Many states now permit
lenders to offer mortgages with variable interest rates. Variable interest rates
fluctuate up or down within certain set limits in response to current interest
rates on comparable loans.
Types of Mortgages
After finding the home of your dreams, the next step is to
secure home financing.
 The goal of your search is to find a lender that
will loan you money at the lowest competitive interest rate. Consider this
interest rate scenario;
Let's assume you intend to purchase a home for $120,000 and
you intend to place $20,000 down. This leaves a home mortgage of
$100,000. (don't forget about other closing costs).
A six percent loan for a 30-year term mortgage of $100,000
will provide a base payment (PMI-principal and mortgage interest
Consider this. There are three ways a mortgage lender
earns money or profits from your mortgage. The first method, mentioned in
our Home Financing section is through the sale
of your loan to another lending institution. This will more than likely
happen in each mortgage situation. The other two ways a lender profits
from your loan is through interest charges and late fees, and through "points".
Points are a one-time fee paid at closing to buy down the mortgage rate. A
point is equivalent to 1% of the loan amount.
In shopping for a mortgage, ask the lender of the
Annual Percentage Rate (APR).
The APR includes the cost of points, mortgage insurance, and other fees.
Understanding APR helps you compare mortgages from various lenders and enables
you to make a logical choice. A 5% interest rate may have a higher APR
when compared to a 6% loan if the lender fees are bloated. All lenders are
required by law to provide you with the APR of the loan, if you make a
request-Make the request!
A point is an
additional charge that raises the upfront cost of the loan (and profit for the
lender) and may reduce the interest rate of the loan for the borrower.
Paying points is a variable decision that each borrower will have to make.
You must evaluate the money saved versus the money spent. In making this
decision, remember, few people carry a loan to full term these days. Most
borrowers sell the home within 7-8 years, or refinance to lower their interest
rate. If a 1% (point) buy-down on a $150,000 ($1500) saves you $7 a month
on your mortgage payment, it will require 215 months (almost 18 years) to get
your $1500 back. Think logically and examine the cost savings over 7-8
years. Buying down your interest rate may not be worth the cost.
Most borrowers need pocket money on the front end of a mortgage rather than over
the long haul. Points can be an excellent opportunity for many borrowers
and it is a standard offering in the mortgage industry.
With many lenders a point is approximately equal to 1/8% buy
down in interests for a 30-year mortgage. Using this general rule of thumb 8
points would reduce a loan by 1%, but few borrowers could afford to pay 8 points
to reduce their rate by 1%. This is unrealistic and the borrower would
never be able to recoup the cost of 8 points over the life of their mortgage. In
general, the difference between a 9% loan and a 10% loan is pretty close to 3
points.
The cost of points may be shared between the buyer and seller
and a good (buyer) negotiator will request from the seller that the seller pay
one point toward the loan. This should be specified in the sales contract
of the home.
Another standard fee that is a normal part of the mortgage
lender's profit structure is an
origination fee. Origination fees may be described as prepaid
points but you should always enquire about the specifics of any charge described
as "prepaid points" in your mortgage description. If a loan description
includes 4 points and the origination fee is not specified as a separate
transaction charge, it is probably that 1% of the four points is charged as the
cost of preparing the loan. The other 3 points may be used to reduce the
interest rate over the life of the loan.
Now that you have a basic understanding of some of the
subtleties of a mortgage, you should begin to assess the type of mortgage that
is best suited for your needs. The navigation buttons to the left, should
direct you to the various types of mortgages that are available to you.
Evaluate each mortgage type carefully. A standard 20 or 30-year mortgage
may not make sense in every situation, but in order to establish the best
mortgage for your own unique situation, you should have a general understanding
of the various types of mortgages available to you.
Choosing A Mortgage That Fits Your Lifestyle
There are many different types of mortgages with a plethora of
features and fees. Choosing the right kind of mortgage based on your
life style could not only make it easier for you to repay the loan
but also save you thousands of dollars.
First, make an honest assessment of your financial position. Do you
have a stable job? If you are in business, does it yield you a
regular profit? Calculate your gross income. If you have a very low
income that deters you from saving anything then you would do well
to opt for a low down or no down payment mortgage. If your income is
good enough to have allowed saving for the down payment its better
that you make 20% or more down payment. The less you owe the better.
Are you sure that you can repay your loan after a sudden loss of
employment? On the other hand, if you as a couple are repaying
together, what if your spouse loses their job, can you still manage
it? A longer amortization period (30years) would mean that you pay a
smaller amount monthly that would be lighter on your monthly budget.
Also, remember that you pay a higher interest and a larger amount
overall incase of mortgages that are spread over longer periods. A
shorter (15years) amortization period would mean that you pay a
larger monthly installment, but a lower interest rate and hence a
smaller price for the house.
A job that pays you bonuses, or retirement benefits where a lump sum
amount is expected can be helpful in making large down payments or
clearing balloon mortgages.
Choosing between a fixed rate loan and one with an adjustable rate
is always a gamble. If the fixed rates are low now, it’s better to
go for that option. The choice between ARM and FRM is based on the
wider economic outlook, whereas the choice of mortgage is more
dependent on your financial situation.
Mobility is another factor that has to be actively considered when
deciding about mortgage. Will your job require you to move away from
your current place of residence to another? Do you see yourself out
of a house in 4-5 years? Alternatively, you do not intend to move
out of the town/city where you live, for the rest of your life. A
short stay may not work in favor of buying a house altogether,
unless rent prices in the area where you live is higher and real
estate prices are appreciating faster. If you plan to sell the house
in 5 years and move out then opt for mortgages where the interest
rate is lower in the first few years of the mortgage. Better still
go for interest only mortgage where you pay only the interest for
the five years you stay in the house. ARM mortgage loans are also
suitable for short home owning periods. The rate in ARMs is very low
during the first few years. Definitely, the interest/interest
principal paid will be less than the rent you would have paid.
People who want to move to a bigger house after a few years can also
consider these mortgages.
It will be assumed here that you have thought well about the kind of
property you have decided to buy. Just make sure that you are
entering into a debt with complete understanding of all the pros and
cons.
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other related topics? This article will be linked back to your own web site. Visit our
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