Types Of Mortgage Loans
The American dream of owning a home comes with a catch...a mortgage. You have to pay for your piece of the dream. It will probably be the biggest purchase you ever make. Regardless of how expense the home is, most of us cannot pay for the entire amount at one time. So we do the next best thing. We borrow. We get a mortgage.
When you borrow money for your house, the mortgage lender uses it as collateral for your loan. If you don't pay, the lender can take your house. A serious mistake to avoid is getting a house that's more expensive than you can afford. Don't be "house poor." Remember that other costs come with owning a home such as insurance, utilities and maintenance. You want to keep the monthly payment low enough so that you can afford all the other expenditures.
Finding The Best Mortgage
Getting the best mortgage for your home can be greatly simplified if you follow a few basic guidelines.
1). First, take the time to find out about the wide variety of possible financing plans available to you (fixed rate, adjustable etc.) Each type of loan is tailored to a specific set of personal needs and expectations. Carefully consider your long-range and short-range goals and your current financial status.
2). Next, shop the loan thoroughly. Whether you do this through a mortgage broker, banks or online with mortgage lenders such as LendingTree and E-LOAN
. At LendingTree you can receive up to four mortgage offers to compare.
3). Mortgage processing takes time. If a full credit package is required by your lender, expect a delay of approximately 30 days to verify all of the information. You can speed up the process by providing the bank with accurate information as quickly as possible.
Choosing the Best Type of Mortgage
The two most common types of mortgages are fixed-rate and adjustable rate. Other types include Balloon mortgages and Jumbo Mortgages.
Fixed-Rate Mortgages
A conventional fixed-rate mortgage is in many ways the most desirable kind of mortgage for most home buyers. As the name implies the mortgage carries a fixed interest rate. You'll receive a schedule of payments, and you'll know exactly how much you'll pay each month.
Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) are different from fixed-rate mortgages because the interest rate doesn't stay the same for the entire term of the loan. Which means, your monthly mortgage payment varies. Within any one adjustment period, monthly payments remain the same. To protect the borrower against sudden increases, some adjustable-rate mortgages may cap the amount by which the monthly payment can be increased between one adjustment period and the next.
Common types of available ARMs:
- A 7/1 ARM has an initial rate that is locked in for seven years. The rate can change every year after that.
- In a 3/3 ARM, the initial rate is locked in for three years, then the rate can be adjusted every three years.
Fortunately for the buyer, most ARMs offer caps that protect against really huge increases in payments. There are different kinds of caps:
- A lifetime cap limits how much the interest rate can rise over the life of the loan.
- A periodic rate cap limits how much your payments can rise at one time.
- A payment cap limits the amount that your payment can rise over the life of the loan.
Before you choose a fixed-rate or adjustable-rate mortgage you need to determine how comfortable you are with risk. If you choose an ARM, and your interest rates jumps sharply, will you be able to afford the higher payments? An ARM is a gamble. Before getting an adjustable-rate mortgage, figure out what the highest possible, worst-case scenario payment could be. If you can't swing it, go for the fixed-rate mortgage.
Alternative types of mortgages include Federal Housing Administrations loans (FHA), and Veteran's Administration Loans (VA). VA loans are guaranteed by the U.S. government, usually carry lower interest rates and require no down payment. FHA loans are confusing because the Federal Housing Administration doesn't actually lend the money. FHA mortgages are guaranteed by the government, but private lenders make the loans.
Length of Mortgage
Mortgages can be paid back over varying amounts of time, depending on the terms you agree on. The two most common payment options are 30 years and 15 years. A 30-year mortgage has the advantage of lower monthly payments, because your loan is spread out over a longer period of time. However, you end up paying thousands of dollars more in interest on a longer-term loan.
With a 15-year mortgage, you have a higher payment each month, but you can usually get an interest rate that's one-quarter to one-half of a percent lower that on a 30-year mortgage. Paying off the loan at a lower interest rate and in half the time results in big savings.
What lenders are required to tell you up front about the terms of a loan.
The Truth in Lending Act, requires disclosure of the essential terms and costs of a loan, including:
- The annual percentage rate, points and fees
- The total of the principal amount being financed
- The payment due date and terms, including any balloon payment where applicable and late payment fees
- If there are variable interest rates involved, the Act requires that you be told the highest rate the lender would charge, how it would be calculated and the resulting monthly payment
- The total finance charges
- Whether the loan is assumable
- The amount of any application fee
- Pre-payment penalties
