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A mortage is
more than just an interest rate. Mortgage packages may include other
variables in addition to the interest rate. These variables may
include points, which are pre–paid interest assessed by the
lender at settlement. Hence, it may be less expensive to pay a higher
interest rate with fewer points than to pay a lower interest rate
and more points.But the most important features to consider are
the types and the terms of mortgage –– such as whether
it is adjustable, fixed or a hybrid of the two, and what the length
of the term is, i.e., 1, 3, 7, 15 or 30 years.
Here are some
of the most common mortgage loans, along with information to help
you decide which is right for you.
Fixed-rate
loan.
If you've found a home you plan to live in for 10 to 30 years, consider
a fixed-rate loan. It's predictable and stable since the interest
rate is set for the full length of the loan. Because the monthly
payment stays the same, planning a budget is easier.
Adjustable-rate
loan.
An adjustable-rate mortgage (ARM) usually starts with a lower initial
interest rate than traditional fixed-rate loans. After a set initial
payment period (usually 1, 3, 5, 7 or 10 years), the interest rate
may change periodically (usually annually or semiannually) based
on market conditions. As the rate changes, your monthly payment
changes. ARM loans feature an adjustment "cap" or limitation
on how much the interest rate can go up or down. This helps limit
excessive changes in your monthly payment.
**Fixed–Rate
Versus Adjustable–Rate<
The two mortgage loans above (fixed and adjustable, or ARMS) are
the most common types of mortgages available. The interest rate
with a fixed–rate mortgage remains the same for the life of
the loan. With ARMS, the rate varies according to movements in the
financial markets.
Jumbo
loans.
These are loans for homebuyers who need larger loan amounts.
Loans
for first time homebuyers.
Often first time homebuyers can take advantage of FHA and VA government
loans, as well as other programs based on income or property location.
These mortgages sometimes require less income to qualify than traditional
loans and may require little or no down payment.
Builder/Lender
Buy–Down
A "Builder/Lender Buy–Down" gives the homebuyer an
initially discounted interest rate which gradually increases to
an agreed–upon fixed rate over a certain period of time.
Convertible
"Convertible" mortgages offer the option to change the
mortgage type after a specified period of time. This allows you
to begin with a lower mortgage rate, then to "catch up"
to your future higher income with a higher rate later.
15–Year
Versus 30–Year Mortgages
15–year mortgages allow homeowners to own their home in half
the time for significantly lower total interest costs, however,
a 30–year mortgage has lower monthly payments.
Which
mortgage is best for you?
First, compare the APR (annual percentage rate) of different mortgages.
The APR indicates the "effective rate of interest" paid
per year, including points and other charges, and spreads them over
the life of the loan. Next, compare points and other fees. Finally,
analyze the terms of the mortgage. Check whether it allows prepayment
without a penalty. If it's an ARM, compare yearly and "life–of–loan"
caps. Then assess the payment schedule and determine what best fits
your present and future needs.
Also consider
how quickly you'd like to repay your loan -- within 15 years, 20
years, 25 years, 30 years? Do you want to make biweekly mortgage
payments? Typically, the sooner you repay the loan, the more you'll
save in interest payments. However, the longer you extend the term
of your financing, the lower your monthly payments may be. So when
choosing a loan term, consider your budget, your long-term spending
patterns, your income over the life of the loan and how long you
plan to stay in your home.
Refinancing
Refinancing a mortgage is simply taking out a new mortgage to pay
off the old one. You may wish to do so if rates drop significantly,
or if you want to change the terms of your mortgage.
Tax
Advantages
Because you can write off the interest payments and real estate
taxes on a primary residence, owning a home offers tremendous tax
savings. These savings may be factored in when your Loan Officer
determines the mortgage amount you can afford. At the beginning
of a loan, the payments are mostly interest, so you have larger
tax savings than later in the life of the loan, where most of the
amount you pay is applied to principal. Because of this unique tax
break, you may be able to afford the home you want sooner than you
think.
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