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Mortgage Loans Explained In Plain English
With the many different kinds of mortgage loans out there, choosing the right one for your needs can be a difficult task. The following points will help you understand the pros and cons of the different types of mortgage loans available to you.
What are the main types of mortgage loans?
There are two main types of mortgage loans?fixed-rate and adjustable-rate mortgages.
A fixed-rate mortgage comes with an interest rate that will never change over the 15, 20 or 30 years that the loan will last.
In contrast, the interest rate of an adjustable-rate mortgage will change. The rates are usually attached to an interest rate index?the LIBOR rate (London Inter-Bank Offer Rate) is a popular one?and your payments will go up and down if the indexes change.
If I get a fixed-rate mortgage loan, what should I keep in mind?
Fixed-rate mortgages offer stability above all. You know exactly what interest rate you will be paying. If you think that your income is not going to change much over the coming years, or if you are planning to stay in your house for a long time, then a fixed mortgage loan is a good option for you.
On the flipside, stability comes at a price. You will initially pay higher interest rates than in an adjustable-rate mortgage loan and you will need to put a higher down payment (somewhere between 10 to 20 percent of the loan) into the mortgage. If you don?t have enough money to afford a high down payment, you will need to get Private Mortgage Insurance (PMI), which will increase your monthly payments.
What should I consider when getting an adjustable-rate mortgage loan?
An adjustable-rate mortgage loan initially gives you a lower interest rate than a fixed one. Many loans give you three to five years during which you pay a low fixed interest rate, and then the rate begins to fluctuate with the market. Some loans will put caps on how much your rate can change from year to year to protect you from market fluctuations. The risk with this type of loan is that interest rates might go up, but then again, interests can also go down and your payments will go down with them.
If you are not planning to be at your house for the long haul or you are planning to sell, then this loan is a better option for you.
How can I compare different mortgage loans?
Mortgage brokers are required by law to provide you with an Annual Percentage Rate (APR). This figure adds up all your expenses (property taxes, insurance, loan fees, interest payments, etc.) and expresses them as a percentage of your loan. For example, a loan might have a one percent interest rate, but when you add all the extra expenses, you will actually pay 1.5 percent. The APR is the best way to compare mortgage loans and decide which one offers you the best deal.
How will mortgage brokers decide whether I can get a mortgage loan?
Mortgage brokers are looking for indicators that tell them that you can pay the loan back. Among the things they will look at are your credit history and whether you have had stable employment for the last two years. It is usually a good idea to ask for a copy of your credit history before you go to your mortgage broker.
Mortgage brokers use a formula called 28/36 to decide if you can afford your mortgage loan payments. This means that your mortgage payments cannot be higher than 28 percent of your income and your total credit payments (for credit cards or other loans, including your mortgage) cannot be higher than 36 percent.
Repayment of Loans - Lessening the Bitterness of the Process
So how have you planned the repayment? Don?t tell if you haven?t started the plannings yet. It is high time the plannings and the decisions be made regarding the repayment of the loan. The amount of loan is a sizeable figure and planning for the repayment on the D-day will only make the repayment difficult.
There are basically four different ways of paying off loans. Depending on the availability of the repayment options with the lender one has chosen to get the loan, borrowers can take up any one of the various repayment options.
The first is obviously for people who have taken loans only for a short period of time. These people normally have enough resources, but because of the urgency of the need and failure to convert assets into liquidity within the desired time make them to resort to the loan providers. However, they may discuss with the lender regarding their intention to repay the loan in full and within a very short time. If the lender allows, they can repay the loan as soon as they have the necessary resources. With the debts being repaid earlier, the borrower gets a peace of mind. The interest cost is also hugely curtailed because lesser is the term within which the loan is repaid, the lesser is the interest charged.
This method however will be suitable only for the business class of people. It is unthinkable for the common salaried people to repay the entire amount of the loan and its interest at one single go. Thus these people go for a different method of repayment. This method requires the amount of loan to be broken into a number of small installments. The calculation of the installment is done by dividing the combined value of the principal and interest by the term of repayment. This reduces the burden on the borrower. The borrower can make this payment through his/ her monthly income. A certain amount of discipline will be required when providing for the monthly repayment. There are many expenditures that we desire to make, but are not able to because of the monthly repayment taking a major share in the monthly income. However one must continue with the repayments as a bitter pill. This will lead to the full and final repayment. Besides, if you fail to pay one monthly installment, it will accrue the next month with the second month?s repayment. This will be more burdensome than the previous option.
The method discussed next has been moulded in such a manner as to lessen the harshness of the above mentioned method. This is similar to the method because the repayments are made in installments. But, the installments are much smaller than in the former. This is because only interest is repayable. The borrower is not absolved regarding the responsibility for the balance of the loan. It is repayable at the end of the term of repayment. Since repayment of the entire amount could be burdensome, borrowers are advised to start planning for the repayment from the beginning. A fund is established where the borrower invests monthly. This fund may or may not be invested in stocks and bonds. Investment in the stock market helps the fund to grow with leaps and bounds because of the good returns that the stocks fetch. However, the borrower is completely broke in case the stocks do not work well. In this case the borrower will have to repay the amount through his own resources. The pension mortgages are the best when compared to the other interest only mortgages. Borrowers pay only half the amount in the pension fund. Thus when the pension fund is being used for the repayment they are only paying half of the amount required for repayment.
Borrowers may also choose to repay the balance of the loan, after making the installments for a certain period, through a balloon payment. The balloon method of payment is also called an early repayment. However, pre-approval of the lender is necessary in order to not be penalized with an early repayment penalty. It is necessary to look out for such clauses when signing on the agreement papers to the loan. This may also be forbidden in cases where the borrower has received cash under a cash back mortgage.
Till the loan is fully repaid, there is no respite. And, this is not the case with secured loans only where some asset has been kept as collateral. People with an unsecured loan too are under the hammer as much as the holders of secured loans. Repayment decisions must not be held as trivialities. They must be thought of in conjunction with the future. There are many people who have lost their homes to the lending companies. Make sure that you do not increase the count by being irregular in the loan repayments.
What Is The Best Deal For A Mortgage?
Few of us invest the time and effort into researching and securing the best deal for a mortgage to purchase our home.
For most of us, our house is the single most important and expensive purchase we ever make!
We invest a lot of time and effort into finding the perfect property in the best location and with as many of the features from our wish list as possible, yet, when it comes to finding the best deal for a mortgage, we take what is offered rather than researching and securing the best mortgage for our situation.
When you consider that the average homeowner will pay out more in interest over the lifetime of their mortgage than the home originally cost, you can see why getting yourself the best deal for a mortgage now, could save you tens of thousands of dollars in interest over the 20 ? 30 year term of your home loan.
Your research for the best mortgages or loans and repayment options currently available can be carried out on the internet, thus making the whole process that much more convenient and time efficient for you.
Mortgages are not a One Size Fits All!
Mortgages come in many different forms and you need to be aware of the various forms in order to determine which one is the best deal for a mortgage to your unique circumstances.
Basically, mortgages fall into one of the following categories. Lenders will have variations of these basic categories, but armed with this information, you will be able to sort through the choices for just the right package.
Fixed Rate Mortgages:
Loan with an interest rate that remains at a specific rate for the entire term of the mortgage/loan. Approximately 75 per cent of home mortgages are this type. A fixed rate mortgage is often considered the best deal for a mortgage for first time buyers as you can establish a consistent relatively fixed budget of household operating expenses.
ARMs or Adjustable Rate Mortgages or Variable Rate Mortgages:
A mortgage/loan with an interest rate that adjusts or varies with the changes in rates paid on Treasury Bills or bank Certificates of Deposit. In Canada, the rates vary according to the posted weekly Bank of Canada rates.
To offset the risk associated with an adjustable rate mortgage, some lenders offer various capping options. Often, they fix or limit the maximum level to which the interest rate you are subject to can rise for a given period of time. Sometimes they fix the cap per year and sometimes for the lifetime of the mortgage.
Adjustable or variable rate mortgages can be very attractive as usually the rates are considerably lower than for fixed rate mortgages. They are an excellent vehicle for borrowers who are attentive to the rate fluctuations and prepared to lock in their mortgage when interest rates start climbing. If youre constantly watching the money markets, this may be the best deal for a mortgage for you.
Balloon Mortgages:
A mortgage in which the monthly payment is not intended to repay the entire loan. The final payment is a large lump sum of the remaining principal. Balloon mortgages are often only partially amortized and requiring a lump sum repayment at maturity.
Its popular mortgage in the US for homeowners who aren?t planning to stay in their new home for more than 5 or 7 years. The advantage is that the interest rate is lower than a fixed rate mortgage however, the disadvantage is that if you remain in the home beyond the 5 to 7 year term, you would have to secure a new loan or mortgage to pay off the balloon mortgage.
Jumbo Mortgages or Non-Conforming Mortgages:
In the US, Congress has legislated a conforming limit to the amount a mortgage is allowable for funding by Federal National Mortgage Association (a.k.a: Fannie Mae) and the Federal Home Loan Mortgage Corporation (a.k.a: Freddie Mac). The 2005 limit is $359,650; $539,475 in Alaska, Hawaii and the U.S. Virgin Islands.
Any loan or mortgage above that conforming limit is considered a Jumbo Mortgage. A Jumbo mortgage/loan allows you to borrow over the conforming limit, but for that privilege, you will incur higher interest rates. There are variations to the Jumbo Mortgage such as the Super Jumbo Mortgage, but Im sure you get the basic picture.
Canadians have an equivalent referred to as a High Ratio Mortgage guaranteed/funded through Canada Mortgage And Housing Corporation (CMHC).
Now that you have identified which type of mortgage might suit you best, you need to consider repayment methods and you basically have two options:
Interest Only:
An interest only payment method can be combined with any type of traditional mortgage. Interest only payment periods almost never run for the entire term of the loan, so prepare to have your payment rise to include both principal and interest once the interest only period ends.
Principal and Interest or Capital & Interest:
Your monthly repayments are divided into an interest payment and a principal or capital repayment. In the early years of the mortgage period most of themonthly payment is swallowed up in interest but over time the balance reverses and you start to pay off more of the capital or principal borrowed.
So Many Mortgage Lenders ... So Many Choices!
There are so many mortgage lenders offering such a variety of loan options that at first it can seem a daunting task trying to determine which lender most suits you and your circumstances and which Lender is offering you the best deal on a mortgage!
It is important to note that as you shop for a mortgage, each lender will perform a credit check prior to committing to the mortgage or loan. Each credit check remains on your credit record and could potentially reduce your credit score and eligibility for a mortgage or loan.
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