Typically, a mortgage loan is a long term commitment. However, it is important to find a mortgage to fit your needs. The most popular term is 30 years. Understanding the process can make you more comfortable and confident in your negotiations. A mortgage requires you to pledge your home as the lender's security for repayment of your loan. Generally for a purchase transaction:
Down payment + Amount of mortgage loan = Purchase price
When you sign a mortgage agreement, you are agreeing to repay the principal plus interest. During the first few years, most of your payments will be applied toward the interest you owe. This is because the interest each month is calculated on the outstanding balance. As the balance is reduced, so is the monthly interest. During the final years of your loan, your payment amounts will be applied primarily to the remaining principal.
You can choose a mortgage with an interest rate that is fixed for the entire term of the loan. A fixed-rate mortgage gives you the security of knowing that your interest rate will never change during the entire term of the loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate.
As the buyer, you pay a down payment in cash, that is a percentage of the purchase price of the home. The down payment represents your equity in the house. Lenders often view mortgages with larger down payments as more secure because you have more of your own money invested in the property.
A lender may charge a loan origination fee or discount points. Simply put, a point is a unit of measure that means 1 percent of the loan amount. The more points you pay, the lower the interest rate. Usually, for each point you pay for a 30-year loan. Your interest rate is reduced by about 1/4 (.25) of a percentage point. Paying points can be good if you plan on keeping the mortgage loan for more than three years.
The closing (or, in some parts of the country, settlement) is the final step. At the closing, your mortgage is activated, and you are given the keys to your new home. Closing costs are a mystery to most first-time buyers. One reason is that they are not standard and vary from state to state. Items may include transfer taxes and recording taxes, title insurance, survey, attorney fees, discount points, appraisal, and document preparation fees.
Check out the Lender Comparison Chart. The Chart can be used to get the information you need to make an informed decision on which mortgage lender offers the best deal for you.
A wide selection of mortgages is currently available. The challenge is to select the loan terms that are most favorable to your situation.
Traditionally the most popular type of mortgage, borrowers enjoy the comfort and security of a fixed rate and payment. Longer term fixed rate mortgage loans, like the traditional 30-year fixed rate loan, offer the most affordable fixed rate option. This mortgage loan may be ideal if you plan to remain in your home for years. Shorter terms, like the 15-year fixed rate loan allow you to build equity in the home faster and save interest expense.
With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted periodically to keep it in line with the changing market rates. This means when interest rates go up, your monthly mortgage payments may go up as well. On the other hand, when interest rates go down, your monthly mortgage payments may also go down. ARMs are attractive because they may initially offer a lower interest rate than fixed rate mortgages. The chief drawback is that your monthly payments may increase when interest rates rise.
You may want to consider an ARM if: your income will rise enough in the coming years to comfortably handle any increase in payments, you plan to move in a few years and therefore are not concerned about possible interest rate increases, or you need a lower initial rate to afford the home you want. A typical ARM will adjust annually, have a yearly cap on interest rate increases of 2%, and a lifetime rate cap of 6%. The interest rate changes on an ARM are always tied to a financial index, such as the average interest rate on Treasury bills.
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