The real estate environment is so full of predatory money-lenders and deceptive practices that the task of home-buying engenders far more apprehension than elation. The prospect of making a home purchase can be baffling in light of the numerous borrowing choices a buyer is deluged with! As for mortgages there are various types of loan terms and interest rates than a first-time buyer can fathom.
It is important to embark upon this bustling market with some foreknowledge of loan terms and types that a prospective buyer is likely to hear from his money-lender or mortgage lender. Take your own informed decisions and home-buying will be a pleasurable experience and not a harrowing one.
When it comes to choosing the length of mortgage a consumer has more choices than ever. While the 15 and 30 year fixed mortgages, the Adjustable Rate mortgages pre-figure as the most popular loans, there are sub-prime mortgages as well, to suit the needs of poor credit-scorers. Jumbo, balloon and others are the lesser known varieties that are again suited for those with typical financial situations and circumstances.
With so many options how does one arrive at the one which is most suited to them the three basic things to consider before making a decision are:
1.What is the best rate you can get
2.What is the monthly payment amounting to
3.Does it fit well into your financial plan
Having said so, lets venture to know more about mortgage loan products and understand its pros and cons.
Fixed rate Mortgages:
Fixed-rate mortgages are traditional loans and by far the most popular ones among home-buyers. It ensures a fixed-interest rate over the life of the loan which is typically 30, 20, 15, or 10 years. With this loan your monthly payment towards interest and principal never changes and is not subject to fluctuations and unpredictability that rule the money market. Down payments required on these loans can be as low as 5%. Normally this type of loan offer the greatest security to borrowers as they are insured against rate changes and rising or falling monthly payments. If you do not mind paying a little extra for this kind of assurance fixed rate types are the ones for you.
Advantages of a 15-year Fixed Rate Mortgage:
• Interest rates are lower than a 30-year loan
• Borrowers build equity quicker than in a 30-year mortgage loan
• Monthly payments are higher
• Restricts home-buyers to making a smaller house purchase than they probably would with a longer term loan
Advantages of a 30-year Fixed Rate Mortgage:
• Lower monthly payments
• Locks in current interest rates for the entire term
• Higher interest can save you on federal taxes
• Sluggish way to build up equity on your house
• Higher rate of interest than a 15-year Fixed Rate mortgage
Non-traditional Term Fixed rate Mortgage:
If the traditional fixed term mortgage is not suited to your needs you can opt for 10, 20 or a 25 year mortgage. Since the non-traditional varieties offer unconventional loan-lengths, they cannot be shopped via web. Consider a rendezvous with your lender. Ask about the rates offered by them. The flip side to this type of loan is that the interest rates are higher when compared with the more regular ones. So, if you want a mortgage outside of the standard 15 or 30 year term, shop carefully and do the math.
To find out the mortgage principal and interest for any particular loan go to Bankrates mortgage calculator for specifics of mortgage lending in your area.
Adjustable rate Mortgages:
An Adjustable Rate Mortgage or an ARM is different from the fixed-rate loans in that, their rates change after an initial period of low interest rate. At the end of the fixed term the rates fluctuate on the basis of an index. The borrower s mortgage liabilities are thus tied to the fluctuating index. His payments can go up or scale down depending on the rate set by the index.
Lenders however do not have free rein on the interest rates. There are caps or limits set on the ARMs that limit interest rates to a specified value.
In an ARM, the initial fixed-rate period can be as short as a month or as long as 10 years. The one-year ARMs, was for long the most popular one where the first adjustment commenced after an year. The more standard ones in recent times are the 5/1 ARMs which has an initial fixed period that lasts up to 5 years. The rates get adjusted annually thereafter. Mortgages with combinations of a lengthy fixed period coupled with an even lengthier adjustable period are known as hybrids. Other popular hybrid ARMs are the 3/1, 7/1 and the 10/1s. The tenure of fixed rates for these loan-types is consecutively 3, 7 and 10 years after which they get adjusted annually.
Interest only ARMs: In this the borrower is required to pay only the interest for a specified period, often 10 years. After that, it adjusts to the interest rate set by the index. During the interest-only period, the borrower can choose to pay some principal, too. Interest only ARMs give a lot of flexibility in deciding ones monthly payments. This factor alone makes it agreeable for people with fluctuating monthly incomes.
Pros of ARMs:
• Good for short-term house ownership
• Some ARMs are convertible to fixed-rate mortgage
• Initial interest rates are very low
• No interest rate guarantees
• Loan may have a negative amortization clause whereby any shortfall of interest not paid monthly can be added back to the principal balance contributing to greater interest
• Difficult to comprehend
Subprime mortgages are meant to salvage those with credit scores under 620. A whole industry of subprime mortgage lending has evolved in the recent past to serve a constituency of Americans reeling under severe credit problems. While recent foreclosures and other severe credit problems can prevent mortgage procurement the not-so-bad credit scorers view this as the last glimmer of hope amidst nay Sayers. Since subprime lending is based upon perceived risk, lenders offer various rates for the same customer as each weighs risk differently. For this reason it is paramount for shoppers to comparison-shop, lest he is locked into an indiscreetly high borrowing rate.
Sub-prime lending is predictably higher than any of the conventional borrowing methods. It depends on factors such as credit score, size of down payment, and the severity of delinquencies the borrower has on record in the recent past.
Subprime borrowers have to be on the look out for predatory lenders and their deceptive practices. Be ware of outrageous fees or disproportionately high interest rates and suggestions for repeated refinancing that can amount to high closing costs each time. To safeguard yourself against such evil practices, check your credit score before looking for a loan and ask people whom you trust, for referrals to mortgage lenders. Do some comparison shopping as well by personally meeting some lenders.
Subprime lending can pack in balloon payment, pre-payment penalty or both. A pre-payment penalty is assessed against the borrower for paying off the loan early. A balloon payment requires the borrower to pay off the entire outstanding amount in one bulk after a certain period has elapsed, often 5 years. Upon failing to tend this payment the borrower must resort to refinancing or sell the house.
A jumbo loan would imply larger than average loan. If the loan amount exceeds $252,000 (a limit set by Fannie Mae and Freddie Mac federal guidelines for loans) then one needs a jumbo mortgage available at higher interest rates.
Pros: One can borrow as much as he needs.
Cons: Has a higher interest rate.
Balloon mortgages are offered at lower rates of interest and lower monthly payments for an initial period that lasts up to five to seven years. At the end of it the borrower is responsible towards paying off the principal in one large sum.
Pros: Save on mortgage costs initially.
Cons: Should the plan change, one has to pay off or refinance the balance which will incur additional closing costs.
Assumable mortgages are relatively rare. In this the borrower or the buyer assumes the seller's debt which is deducted from the purchase price of the house. For instance, a buyer assuming a $40,000 loan as part of a $90,000 purchase price would only be accountable for the $50,000 difference, either in cash or in other type of financing.
Pros: Reduced monthly payments and no closing costs involved.
Cons: Buyers must have the means ready to pay off the difference between the asking price and the loan balance.
Construction loans are for those who want to build homes than buy ready made houses. The borrowing process in this is two-fold. For the entire period of construction the borrower pays a higher rate of interest. All construction expenses are met from the loan drawn and the borrower is responsible towards paying the interest accumulating on the outstanding balance. In the post-construction phase, the loan converts into a fixed-rate mortgage whereby the borrower settles the final loan in regular periodic payments.
Finally, with a plethora of choices, a home-buyer must evaluate his financial circumstances and weigh his financial goals before committing themselves to any mortgage arrangement. The trick is to consign oneself to a loan term, as brief as it can be coveniently accommodated, within ones scheme of financial affairs, so that the interest paid can also be kept as low as possible.
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