Sunday, February 05, 2006

Types of Mortgage Loans, which one is best for you

The following describes mortgage options that may be available to you, individually or in combination.

Low Interest Rate Mortgage

Generally the best way to find the lowest rate is to shop around. But every time you go to a bank they pull your credit bureau and applying too many times can lower your beacon score. Going to a mortgage broker is the best way to find your best rate and terms. They pull your credit bureau once and will shop a wide variety of banks for you, determining the best rate and terms. A broker may also know of smaller lending institutions which offer much more competitive rates than a large bank or finance company.

Adjustable Rate Mortgage

With an adjustable rate mortgage (sometimes called ARM) your payments will change over time to reflect any current interest rate fluctuations. The interest’s rates are adjusted semi-annually or on an annual basis. If the rate goes down your mortgage payments will go down and if the rate goes up so do your payments. The initial adjustable rate is usually low as an incentive, but you take the risk of having the rate go up or down depending on the current rates at the time of adjustment. An adjustable rate mortgage can look fairly attractive with low rates in the beginning but can cost you more in the long run so consider it carefully.

An adjustable rate mortgage are generally suited for people with a little more risk tolerance who would be able to make a higher payment amount if the interest rate went up. Some Adjustable rate mortgages include the option to lock in the rate if the rates go up, be sure to ask.

Fixed Rate Mortgages

With a fixed rate mortgage your monthly payments will be the same over the term of the mortgage. Your payment amount will not change. Generally the interest rate is a little higher for fixed rate. Fixed rates work best when interest rates are staying fairly stable. If the interest rates drop you can not take advantage of the benefits as you can with the adjustable rate.

Fixed rate mortgages are generally suitable for people with less risk tolerance that have a set income and don’t expect it to change over time.

Interest Only Mortgage

An interest only mortgage is like a line of credit. You only pay the interest on the mortgage. You have more flexibility in the payment amount, but the debt will never be paid off. You can structure this so you only pay the interest in the first 5, 10 or 15 years, this will reduce your mortgage payment amount significantly. At the end of the term you you have the option to pay interest and principal at an accelerated rate or you can choose a Balloon Mortgage (Mortgage loan principal becomes due at the end of your term).

Interest only loans come with many different options such as a fixed interest rate for the entire term or and adjustable rate which carry a fixed rate for a certain number of years and then adjust every 6 months to a year.

Interest only mortgage loans are generally ideal for people whose income is sporadic, either because they are on commission or they are seasonal or self - employed. In some cases they have the option to make payments 6 months only out of the year at a higher re payment on the principal amount.

Balloon Mortgage

With a Balloon Mortgage you will pay regular payments until the end of the term and at that time the full amount becomes due (called the Balloon payment), you are likely looking at a term of 3 or 5 years. A balloon mortgage will only be subject to interest rate adjustment once after the initial rate is set. The initial interest rates are lower.

Typically Balloon Mortgages are ideal for people who want to take advantage of lower interest rates and that are going to be in their home for a defined period of time. However there are disadvantages. If the interest rates go up refinancing may become more difficult and costly at the end of the term and you may have to re-qualify and have the home appraised again. It may end up that the appraised value is less than expected. So find out what your refinance options are.

Assumable Mortgage

An assumable mortgage is one that can be passed on from one owner to another. This can be an advantage if the current mortgage has a good rate compared to getting a brand new mortgage. You can only assume a mortgage if you have a down payment large enough to cover the difference between the value of the house and the amount of the mortgage.
If you don’t then you may have to look into a 2nd mortgage to cover the difference. Generally 2nd mortgages are at a higher interest rate.

Generally this mortgage type is a little riskier because you are assuming “as is”. You may not have all the options you would have with a brand new mortgage such as, prepayment privileges and payment frequency options.

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