|
|
 |
|
| |
|
| FAQ: General Mortgage Information |
|
Are There Different Types Of Mortgages?
Yes. The two basic types of mortgages are fixed rate and adjustable rate.
Fixed Rate Mortgages
If you're looking for a mortgage with payments that will remain essentially unchanged over its term, or if you plan to stay in your new home for a long period of time, a fixed rate mortgage is probably right for you.
With a fixed rate mortgage the interest rate you close with won't change and your payments of principal and interest remain the same each month until the mortgage is paid off.
The fixed rate mortgage is an extremely stable choice. You are protected from rising interest rates and it makes budgeting for the future very easy.
But in certain types of economies, the interest rate for a fixed rate mortgage is considerably higher than the initial interest rate of other mortgage options. That is the one disadvantage of a fixed rate mortgage. Once your rate is set, it does not change and falling interest rates will not affect what you pay.
Fixed rate mortgages are available with terms of 15 to 30 years with the 15-year term becoming more and more popular. The advantage of a 15-year over a 30-year mortgage is that while your payments are higher, your principal will be paid off sooner, saving you money in interest payments. Also, the rates may be lower with a 15-year loan.
Adjustable Rate Mortgages (ARMs)
An adjustable rate mortgage is considerably different from a fixed rate mortgage. ARMs have only been around since the early 1980s. They were created to provide affordable mortgage financing in a changing economic environment.
An ARM is a mortgage where the interest rate changes at preset intervals, according to rising and falling interest rates and the economy in general. In most cases, the initial interest rate of an ARM is lower than a fixed rate mortgage. However, the interest rate on an ARM is based on a specific index (such as US. Treasury Securities). This index reflects the level of interest rates and allows the lender to match the income from your ARM payment against their costs. It is often selected because it is a reliable, familiar financial indicator. Monthly payments are adjusted up or down in relation to the index.
Most ARMs have caps limits the lender puts on the amount that the interest rate or payment may change at each adjustment, as well as during the life of the mortgage. With an ARM, you typically have the benefit of lower initial rates for the first year of the loan. Plus, if interest rates drop and you want to take advantage of a lower rate, you may not have to refinance as you would with a fixed rate mortgage. An ARM may be especially advantageous if you plan to move after a short period of time.
The convertible ARM is an option that is currently very popular because it allows you to convert to a fixed rate mortgage after a specified period of time has elapsed. For instance, you could get a one-year ARM with the option to convert to the prevailing fixed interest rate at any time after the first through the fifth adjustment period. Convertible ARMs offer the ability to take advantage of lower rates initially and have possible savings, and the option to convert to a fixed rate loan later on when you may be able to better afford it. Depending on your financial needs, you might find this option the best of both worlds.
As a relatively new phenomenon, the purpose of an ARM is often misunderstood. Ask your mortgage lender to explain the details to you so you can determine if this type of mortgage fits your specific financial situation.
How Do I Know Which Type Of Mortgage Is Best For Me?
Since some mortgage options are less conservative than others, it is important to determine if you are a "risk-taker" or if you prefer more stability in your financial dealings. Do you invest in the stock market? Or put money into Certificates of Deposit? These are two different ways of handling money. Depending on your answers to these questions, and others that may be asked by your lender, you will be able to choose the mortgage that is right for you. We will give you the right loan information.
Why Should I Take An Adjustable Rate If My Credit Scores Are Sub-Prime?
When you have sub-prime credit scores, there is no reason to lock yourself into a high fixed rate for 30 years. Adjustable programs are not designed to keep for the entire duration of the loan. There is a fixed portion of the loan in its maturity stage. This is where you can take advantage of the discounted rate and also try to improve your credit during this time. When the fixed stage is over and the interest rate becomes adjustable, you should look into refinancing the loan, considering that your credit has improved.
What is the APR?
To protect the public, congress decided that a more precise measure of the true cost of a mortgage loan was needed. The concept of the annual percentage rate (APR) was developed to more accurately reflect this cost factor. The APR represents not only the rate of interest charged on the loan but certain other prepaid finance charges. These costs are expressed in terms of percent and may include, among other costs, the following: origination fees, loan discount points, private mortgage insurance premiums, and the estimated interest prorated from the closing date to the end of the month.
Please note: What may appear as a low interest rate may have a lot of optional loan discount points added to increase the effective rate to the lender. Reviewing the APR will help you to determine if this type of situation exists. When shopping for mortgage rates, get the APR from your lender to make sure you have an accurate comparison to other available mortgage rates.
Why Is The Annual Percentage Rate (APR) On The Truth In Lending Disclosure Higher Than The Rate Shown On My Mortgage Note?
The APR rate reflects the cost of your mortgage loan as a yearly rate. This rate is generally higher than the rate stated on your mortgage note because the APR includes other costs, such as origination fee, loan discount points, and prepaid interest. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders.
Why Is There A Prepayment Penalty?
Most loans are sold on the secondary market; the mortgage company only services the loan. The investors need assurance that they can retain the margins they need on each of their loans for lending their money.
Do I Need Title Insurance?
The lender will check the title to the property to make sure there are no outstanding liens or title problems. The lender requires, and sometimes will arrange for, title insurance to protect the property against unforeseen problems. This is called a "lender's" title insurance policy. You may want to obtain title insurance to protect your own interest in the property. This is called an "owner's" title insurance policy. These policies ensure that your property is free and clear of any title defects, claims or encumbrances.
What Is Private Mortgage Insurance?
Private mortgage insurance, also referred as PMI, is a type of insurance that protects the lender from loss in the event the borrower fails to make loan payments as agreed.
When Do I Need Private Mortgage Insurance (PMI)?
If the down payment on your home is less than 20%, your lender will probably require that you get private mortgage insurance. This insurance insures the lender against possible default on the loan. It is not to be confused with mortgage life insurance or homeowners insurance.
The cost of PMI is divided into two parts. The first part is a payment made at the loan closing. The second part is an ongoing payment made each month along with the principal and interest payment.
Normally, PMI may be removed if you have reduced the principal amount of your loan to 80% or lower than the original purchase price. It also may be removed if you have obtained an independent appraisal stating that the outstanding principal amount of the loan is 80% or lower than the appraised value. Some lenders do not require PMI. Instead, they may increase their origination fee and/or the interest rate on the loan. This can
|
|
|
|
|
| |
|
|
| |
|
|
