Different
Types of Mortgages
Two of the most common mortgages are the adjustable-rate mortgage and
the fixed-rate mortgage.
Fixed-rate Mortgage
•The Fixed-rate mortgage has an interest rate that stays constant
throughout the life of the loan. If, for example, the loan is termed for
15 years, the interest rate will be fixed to the initial one, regardless
of the increase or decrease of the market rates.
•There are different pros and cons to the periods of the Fixed-rate
mortgage. For instance, the 30-year-fixed rate may be a good option for
people who do not plan to sell their home for many years, as the payments
will usually be the same. The downside, however, is that interest rates
are at their highest level with this option, as compared to shorter payment
scheme of 20-year and 10-year-fixed-rate.
Adjustable-rate Mortgage
•The Adjustable-rate mortgage has terms where the interest rate
may change at the end of pre-determined intervals. For instance, if the
agreement says interest change in periods of six months, then the rate
will assume the market rates after the six months period.
This can be a blessing or a curse, depending on the market. Most adjustable-rate
mortgages have an interest rate cap that protects them at a certain point
from adverse market rates.
Usually Adjustable-rate mortgages are for terms of 2-5 years, but can
be longer or shorter. At the end of the agreed period, the interest rate
will become variable, unless the home is sold or refinanced. If that is
likely, the lower interest rates of the ARM loan will be a benefit.
The starting interest rate for Adjustable-rate mortgage is sometimes
a couple of percentage points lower than the interest offered in Fixed-rate,
but because of market fluctuation, it can go several points higher in
a course of a few years.
Balloon Mortgage
Though not as well-known as the first two, the balloon mortgage allows
that borrowers may make fixed amount payments for a certain period of
time, and then make one large payment, or balloon payment towards the
end of the loan.
If you are planning to sell off the property or to refinance it to buy
another property eventually, the balloon mortgage is a good option.
Graduated Payment Mortgage
The graduated payment mortgage is similar to the balloon mortgage, except
that the borrower is not required to make a large payment at the end of
the payment period. Often with a graduated payment mortgage, the payments
start off small. The payments will then gradually increase until they
reach a stable point.
Reverse Mortgages
•A reverse mortgage is a special type of loan that seniors can
sometimes get to convert the equity in their homes to cash. Many reverse
mortgages allow loan advances, which are not taxable, and generally do
not affect Social Security or Medicare benefits.
•Originally designed for retirees who have insufficient
incomes, reverse mortgages have typically been used to help people on
low fixed incomes keep their homes and still make ends meet.
Elderly homeowners can retain title to their homes until they move, sell
the home, die, or reach the end of the loan term. They could be in a nursing
home or other medical facility for up to 12 months before the reverse
mortgage would be due.
•Reverse mortgages tend to be more expensive than other loans because
they are rising-debt loans. This means the interest is added to the principal
loan balance every month. The total amount of interest owed increases
significantly with time as it compounds.
•Reverse mortgages use up all or some of the equity in a home.
That leaves fewer assets for the homeowner or heirs. Lenders generally
charge origination fees, closing costs and sometimes, servicing fees.
•Interest on reverse mortgages is not a tax deduction until the
loan is paid off in part or entirely. Because homeowners retain title
to their home, they are still responsible for taxes and insurance.
Investment-backed Mortgage
Investment-backed mortgages are a type of loan where it is not necessary
for the borrower to pay down the balance during the term of the contract.
Instead, they accumulate an investment with the idea of making the payment
in the future. With this plan, only the interest is paid on a monthly
basis.
There is no guarantee that the investment will be sufficient to cover
the balance at the time of maturity, and therefore they could lose their
property. Obviously, this is high-risk. Investment-backed home mortgages
do offer some advantages, however, due to the fact that they are a cheaper
way for buyers to take advantage of low mortgage rates.
Doing Research on the Internet
Personal Security
Particularly when getting quotes and doing research on the internet,
do not give any personal information unless there is a clearly displayed
guarantee that your information will not be shared. This way, you will not be vulnerable to fraud and will not be barraged with unsolicited offers.
Online Rate Calculators
Online mortgage calculators can help you make informed decisions about
the type of mortgage that best suits you. They will also help you gauge
the amount of mortgage that you can actually afford to repay.
Online mortgage calculators can help you to determine what mortgage amount
is affordable now and in the near future; determine monthly payments by
calculating loan amount, length of loan, interest rates, and terms; compare
different mortgage products; compare length of loan benefits; determine
how extra payments will help you decrease the number of years of the mortgage
payments.
Before you make any decision about the mortgage process, find and use
one of the hundreds of online loan and mortgage calculators. Here are
a few places you might look: Bankrate.com, Calcbuilder.com, Interest.com and
HSH.com.
Competition is a Good Thing for You
Try to get a company that is not a lending institution itself, but merely
an information source. As such, they will have multiple providers who are
competing for your business. This is to your advantage because it reduces
the time and effort in searching for a lender and may result in better
rates.
Be in Charge
When you do get to the point of contacting different lenders, be sure
to make it clear you are 'just shopping' and comparing at this point and
not ready to make a commitment. Since they will not want to lose you to the
competition, they may go to greater lengths to get you a better rate than
their competitors may. The best of this is they may offer to 'go one better'
than the lowest rate you find.
No Commitment
'Just looking' is just that. Do not feel obligated when someone gives
you a quote. Even if you think they are best, tell them you will call
them back when you make a choice between all of the options you are considering.
Do not be pressured and take your time.
The Government May be Able to Help You
Government loans may help lower the costs of mortgages. One of the agencies
is the Federal Housing Administration, which is part of the Department
of Housing and Urban Development. The FHA offers a financing program for
mortgages that has significantly lower interest rates.
The FHA will not be paying for the loan, but will serve as your guarantor.
This allows people who may not otherwise qualify for a loan to be eligible.
Other agencies like the Veterans Administration and the Rural Housing
Service, offer help to these markets.
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