A Mortgage Is More Than An Interest Rate
Mortgage packages may include other variables in addition to the interest rate.
These variables may include points, which are prepaid interest assessed by the
lender at settlement. Hence, it may be less expensive to pay
| a higher interest
rate with fewer points than to pay a lower interest rate and more points.
But the most important features to consider are the types and the terms of
the mortgage such as whether it is adjustable, fixed or a hybrid of the two, and what the
length of the term is, i.e., 1, 3, 7, 15 or 30 years.
FixedRate Versus AdjustableRate
The two most common types of mortgages are fixedrate and adjustablerate mortgages (ARMS). The interest rate with a fixedrate mortgage remains the same
for the life of the loan. With ARMS, the rate varies according to movements in
the financial markets.
Other Mortgage Types
Some mortgages offer fixed rates for a period of time, then adjust the interest rate later to fit market conditions. While they usually offer a lower market
rate to begin with, the interest rate may eventually rise or fall.
A "Builder/Lender BuyDown" gives the homebuyer an initially
discounted interest rate which gradually increases to an agreedupon fixed rate
over a certain period of time.
"Convertible" mortgages offer the option to change the mortgage
type after a specified period of time. This allows you to begin with a lower
mortgage rate, then to "catch up" to your future higher income with a
higher rate later.
15Year Versus 30Year Mortgages
15year mortgages allow homeowners to own their home in half the time for significantly lower total interest costs, however, a 30year mortgage has lower monthly payments.
Which mortgage is best for you?
First, compare the APR (annual percentage rate) of different mortgages.
indicates the "effective rate of interest" paid per year, including points and other charges, and spreads them over the life of the loan. Next,
compare points and other fees. Finally, analyze the terms of the mortgage.
whether it allows prepayment without a penalty. If it's an ARM, compare yearly
and "lifeofloan" caps. Then assess the payment schedule and
determine what best fits your present and future needs.
Refinancing a mortgage is simply taking out a new mortgage to pay off the old one. You may wish to do so if rates drop significantly, or if you want to change the terms of your mortgage.
Because you can write off the interest payments and real estate taxes on a
primary residence, owning a home offers tremendous tax savings. These savings
may be factored in when your loan processor determines the mortgage amount you
can afford. At the beginning of a loan, the payments are mostly interest, so you
have larger tax savings than later in the life of the loan, where most of the
amount you pay is applied to principal. Because of this unique tax break, you
may be able to
afford the home you want sooner than you think.
Annual Percentage Rate (APR):
rate reflecting the cost of a mortgage at a yearly rate.
Taking the loan over from the
holder (seller) and becoming liable for the repayment.
A type of mortgage
usually used for a shortterm, fixedrate loan which involves small payments
for a set period of time and one large payment for the remaining amount at a
time specified in the contract.
A mortgage in which the seller
and/or homebuilder subsidizes the mortgage by lowering interest rates during the
first few years. Payments may increase when the subsidy expires.
Usually found on adjustable rate
mortgages, these limit the amount that the interest can rise.
Money paid to make up the
difference between the purchase price and the mortgage amount.
Escrow: A neutral third party who carries
out the instructions of both the buyer and the seller to handle all the
paperwork of closing. Escrow may also refer to an account held by the lender
into which the homebuyer pays money for tax or insurance reasons.
FHA Loan: A loan that is insured by the
Federal Housing Administration and is open to all qualified home purchasers.
Fee charged by a lender
to prepare loan documents, make credit checks, inspect and sometimes appraise a
property; usually computed as a percentage of the loan.
Principal, interest, taxes and
insurance. Also called monthly housing expense.
Prepaid interest assessed at
closing by the lender. Each point is equal to 1% of the loan amount.
The part of your mortgage
payment that directly pays off your loan. This does not include the interest,
taxes or insurance that may be a part of your loan payment.
Document which gives evidence of
Is simply taking out a new
mortgage to pay off the old one.
You may wish to do so if rates drop
significantly, or if you want to change the terms of your mortgage.
VA Loan: Longterm, low or nodown
payment loan guaranteed by the Department of Veterans Affairs. Restricted to
individuals qualified by military service or other entitlements.
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