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9053 Mathews Road, |
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What is the right mortgage for you?
Before shopping for a loan - or even a home - you should learn as much as you can about the range of mortgages offered by local financial institutions and the different interest rate they carry.
Only a few years ago, there were no more than a dozen types of mortgage loans available in most areas of the country. Today, hundreds of different types of loans are offered. The loan selection process, therefore, can be complicated and you will need plenty of time to evaluate your choices and select the mortgage best tailored to your needs. You may find a mortgage unique to one lender that meets your needs better than any other in the market. Some lenders are more willing to accept more risks than others, just as some home buyers are able to risk higher monthly payments than others. The selection of mortgages you'll find today reflects ways in which risk is distributed. They are usually priced so that the loans that are riskiest to the lender carry the highest interest rates, while those with the least risk to the lender have the lowest rates. Today, there are three major types of mortgage loans - the conventional, the FHA-insured and the VA-guaranteed. Loans classified as conventional involve transactions between the borrower and the private sector of the economy. Repayment of the debt rests primarily upon the borrower and are available to anyone who can qualify. Because there are so many different types of conventional loans and new ones are being developed all the time, we've tried to select some of the more common types and describe them in general terms. Fixed-Rate Mortgage - Is the most frequently used plan in many parts of the country. It is a fully amortized mortgage which means that the borrower pays a constant amount, usually monthly, that is applied first to the interest due and then the balance is applied to reduce the principal of the loan. At the end of the term (typically 15 - 30 years) the loan is fully paid-off. The fixed-rate mortgage places 100% of the risk that interest rates may rise, on the lender. For this reason, fixed-rate mortgages generally carry the highest interest rate, but the borrower is not exposed to the risk of higher interest rates in the future. Adjustable Rate Mortgage (ARM) - Adjustable rate loans generally are originated at one rate of interest, with the rate fluctuating up or down during the term of the loan based on a certain preselected index (usually U.S. Treasury securities). Generally, interest rate adjustments are limited to one per year and there ia a set maximum number of increases that my be made over the life of the loan. ARMs typically have lower initial interest rates and therefore, a lower monthly payment, but the borrower is exposed to the possibility of rates going higher in the future and their monthly payment increasing as a result. Graduated Payment Mortgage (GPM) - The borrower may elect to take advantage of a flexible payment plan generally used to enable younger buyers to purchase a home. Under this plan, the borrower makes lower payments the first few years of the plan (typically the first five years) and larger payments for the remainder of the term, when the borrower's income is expected to have increased. Balloon Payment Loan - When a mortgage loan is not fully amortized (paid off) by the time the final payment is due, the final payment is a larger amount than the others and is referred to as a "balloon" payment. Risk works both ways. If you can handle any potential increases, but expect rates to actually decline while you own your home, an ARM would provide a lower rate and mower monthly payments. But, if you have a fixed rate mortgage and decide to take advantage of a sharp drop in interest rates, you will have to refinance your current loan. In any respect, you need to carefully evaluate your current financial situation and also make some careful assumptions about your future finances. A closer examination suggests the need to look at not only the likelihood of an increase in earnings, but also how long you plan to live in the house and whether its value will increase significantly during this time. |
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