How to Choose the Best Mortgage
When you are done with paying the mortgage payments, you would have paid more in interest rate alone than the actual purchase price of the house. If you borrowed $125,000 at the interest rate of 8% for thirty years, you would have more than $205,000 in interest additionally with the principal amount you borrowed. The house of $125,000 has cost you $330,000, so it is really important to choose the best mortgage with a great care because it may be the biggest financial decision in your life.
There are a number of mortgage options available in the market so it is important to do your study to decide which kind of mortgage, bank, saving and loan, mortgage bank, finance company or credit union is the best option for you. The online information makes this process easier. It is pretty easy finding that how much amount you can afford, comparing loans, searching for the lowest interest rate in your area and applying for a loan online.
Although there are many mortgage types available, most fall into one of several general categories:
Fixed rate mortgage is the traditional loan with the life of 10, 15, 20 or 30 years typically. The interest rate, principal amount and monthly installment normally never changes for the entire terms. Down-payments on these types of loans may be as low as 5% of the principal amount. If you want predictable payments over the life of your loan and don’t mind paying a bit more for this assurance, the fixed rate mortgage may be the best option for you.
Adjustable Rate Mortgage (ARMs)
The adjustable rate mortgage or ARMs start at lower payments, but the interest rate is subject to the market interest rate so payment and interest may be different over a period of time. A typical adjustable rate mortgage is adjusted annually although some loans are adjusted more frequently. The increase in interest is capped for any specific year or for the entire life of loan. For example, an ARM might have the cap to two percentage for the year and cap of six percentage points for the life of the loan. An ARM that starts at the percentage of 7.5 may increase up to 9.5 percent in the second year, 11.5 percent in the third year, 13.5% in the fourth year, at which point it would be capped. Such kinds of loan are suitable for the people who expect higher income in the coming years. They think that their higher income will make it affordable to pay higher interest in the subsequent years.
Balloon mortgage is a better option if you have plans to move in the five to seven years. This loan type offers you a lower interest rate if you don’t want to choose the adjustable mortgage. Balloon mortgage has lower interest rate as compared to the conventional loan having the term of thirty years, but the loan term is five to seven years in case of balloon mortgage. If you don’t move and are still in the house then you may need to get another loan to the prior one.
Jumbo loans are what their name suggests, these are larger than average loans. The majority of the lenders follow Fannie Mae and Freddie Mac federal guidelines for loan which puts a limit that you only can borrow $252,700. You should look for a jumbo loan if you need a higher loan than this.
Reverse mortgage offers an opportunity to homeowners that are above 62 to convert a portion of the equity in the primary residence into income. This type of mortgage has got popularity and more people want to opt for this because it offers a chance to pay a variety of expenses. Reverse mortgage loans are secured by the home and owner does not need to pay back the loan until they sell, permanently move out of the home or die.
Loans with pre-payment penalties
The pre-penalty can be the part of any kind of loan. It is suggested checking the lender that the type of loan you are opting for has the pre-penalty attached with this or not. Loans with these penalties may offer initially lower payments in exchange for a promise to pay a specified lump sum if the borrower refinances the date specified in the mortgage agreement.
Buy-down mortgage offers a chance to borrowers to get a low interest loan by paying a lump-sum fee or a fee that is financed throughout the life of the loan. This type of loan it like paying the points, but normally are paid by the seller or a builder as an advantage to execute a sale by lowering the monthly payments. It is to keep in mind that the cost of these point might be included in the selling price that can cause you paying more than the appraised value of the home.