When you obtain a mortgage loan, you borrow the principal, the amount of
money required to pay for the property, and you pay interest, what the
lender charges you to borrow the money. The way the payments are spread out
over the life of the loan, you pay more in interest than principal in the
early years, which gradually reverses itself as the loan ages.
Mortgage loans come in a variety of flavors, one of which will best suit
different borrowers with different situations. To find the best loan for
your needs, think about your short and long term plans, your financial
goals and your risk tolerance. Here are some scenarios to consider,
along with the generally recommended home loan types for each.
Individual borrower situations vary. Contact your Mortgage
Consultant for specifics on what is best for your situation.
If you plan to live in your home for many years,
Look for a low interest rate over a long period of time. Since you are going
to be making payments for many years, your best strategy may be a
fixed rate loan and pay points to get your
rate as low as possible.
If you want to budget for a fixed payment each month, or don't want to risk
paying higher interest rates,
Avoid adjustable-rate or balloon loans. A fixed rate loan has a principal
and interest payment that stays the same for the entire term of the loan.
Loan terms can range from 10 to 40 years, though the most common is a
30-year loan. Many borrowers take advantage of another option: a "biweekly"
mortgage, where you pay half of your monthly payment every two weeks. This
results in an extra payment being made every year, which shortens your
Fixed rate loans are the most stable and the least flexible loans. They are
recommended if you are planning to keep your home for many years, can easily
qualify for the loan amount, want to lock in a low rate and expect overall
interest rates to increase or remain the same.
If you plan to sell or refinance your home in just a few years,
You may wish to avoid points and closing costs, since the difference in
interest payments won't typically make up for your out-of-pocket expenses at
closing. Also, look for a loan that enables you to commit to a smaller down
is usually a good choice for holding rates down for a set number of years.
If you want to pay off the home loan by the time you retire or your kids are
Shorter-term loans are an excellent way to ensure that you can use your
income for other goals later in life. Another benefit is that you build
If you are comfortable with the risk of higher interest rates if it means
you can qualify for a larger mortgage right now.
Adjustable rate mortgages are a great solution for people with incomes that
are going to grow and who will quickly refinance or be able to afford a
larger payment in a few years if interest rates rise.
An adjustable rate mortgage (ARM)
is a loan with an interest rate that adjusts periodically to reflect changes
in a specified financial index, such as the one-year Treasury Security rate,
the Federal Home Loan Bank?s 11th District Cost of Funds Index (COFI) or
others. ARMs may adjust every six months or once a year. Most ARMs have a
cap that protects your monthly payment from increasing too much, as well as
a lifetime cap, a rate that your ARM will never exceed.
ARMs generally have the lowest initial interest rate and payment and will
usually guarantee that rate for a fixed period -- anywhere from a month to
10 years, as in a "two-year ARM" or a "five-year ARM." You also may qualify
for a larger loan amount with an ARM than with a fixed rate mortgage. ARMs
are recommended if you plan to keep the loan for a short time -- for
example, if you plan to move and sell the house within the three-year fixed
term of the loan. With an ARM, you do risk your interest rate increasing,
but you also have the advantage when rates go down, because your payment
will go down and you can pocket more money each month.
To pick the loan that?s right for you, we recommend first determining how
long you think you?ll live in your new home and then working with a Home123
Mortgage Consultant to optimize your monthly cash flow.
Points and APR
At first, making sense of interest rates, points and annual percentage rates
(APR) can be daunting. But it doesn't need to be. Like choosing the right
loan type, it's all about choosing the down payment and monthly payment that
fits your needs and lifestyle.
See How Your Interest Rate Affects Your Payment
The interest rate on a loan is used to calculate your monthly payment. The
higher the interest rate, the higher your monthly payment. The lower the
interest rate, the lower your monthly payment. Use the Home123 calculator to
see how this works.
Lower Your Rate and Payment with Points
Also know as a loan's "origination fee," points are fees paid to the lender
at closing. Each point is equal to one percent of the loan amount. For a
$100,000 loan, one point equals $1,000. Two points would be $2,000.
So if you have the cash to put towards paying points, it may be a good way
to save money on interest over the life of your loan. See how points affect
rates. If you're low on upfront cash, then go for fewer points. All the
points you pay on a home purchase mortgage are deductible in the year you
pay for them. Consult your tax advisor for more details.
Use the APR to Compare Loans
The APR expresses the annual cost of a loan as a percentage, factoring in
its rate, as well as the points and other finance charges over the life of
The Truth in Lending Act requires that all advertisements for home loan
credit terms include the APR. The APR is intended to enable you to fairly
compare terms of loan products from different lenders. To make an accurate
comparison, compare loans with the same terms, interest rates and points.
Then look at the APR. The loan with the lower APR is the less expensive
Lenders also provide the APR along with a loan's interest rate in the Truth
in Lending Disclosure Statement. This document will be mailed within three
days of your application submission.
Know When to Lock
If you're afraid rates are headed up, protect your buying power by locking
in the rate at the time you apply for your loan.
What should you look for in a rate lock? Make sure it allows enough time for
your loan to be processed. This is important because some lenders may offer
rate protection for a short period of time, say 10 days - not long enough
for many loans or home sales to reasonably be completed. If you exceed the
lock-in period and your rate expires, the lender may not honor the rate you
locked. Consult your Mortgage Consultant for advice on locking in your rate.
Think rates might drop while your loan is being processed? At the time of
your application, you might want to take a risk and let it "float" instead
of locking. You can watch rates and lock in at any time until the day before
your loan closes. The moment you tell your lender to lock the rate, that's
the rate you'll get. But be careful. Rates are difficult to predict just
like the stock market. And if rates suddenly shoot up, you could find
yourself with a higher monthly payment than you planned or, even worse, be
unable to afford the home of your dreams.
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