Mortgage Loans

There are several different types of mortgage loans, finding the right loan for your needs can be a bit tricky if you don't know the facts. Fixed rate, FHA, VA, and interest-only mortgage loans are the most common.

Fixed rate mortgage loan
A fixed rate mortgage is usually more expensive than adjustable rate mortgages. A fixed rate mortgage is a loan where the interest rate remains the same throughout the duration of the loan. What this means is you will lock in an interest rate on the note and it will not change over the term of your mortgage. The payment amount on the mortgage is independent from other additional cost like property taxes and property insurance. Typically an escrow account handles the additional costs on a fixed rate mortgage. The payments you make to your account will remain the same for the principal and interest on the loan, but the payments may change over time to accommodate the changing escrow amount.

A fixed rate mortgage has been the most popular mortgage loan in the past. You can choose from a 10-year, 15-year, 20-year, 30-year, 40-year, and even a 50-year fixed rate mortgage. The major advantage of a fixed rate mortgage is that they present a predictable housing cost for the duration of the loan. For many people a 30-year fixed rate is perfect for their circumstances. A fixed rate mortgage provides a never-changing monthly payment schedule and it has the lowest monthly payment amount of fixed rate mortgage loans.

Some people have taken to a 15-year mortgage to save money on interest. Many people like this type of loan because they can own their home in half the time it takes other people to buy their home. If you are buying a first-time home with small children, you can pay off the loan before they start college. The major disadvantage to a 15-year mortgage is the higher monthly payment amount. Be certain you can afford the higher monthly payment, if you cannot, check into a 20 or 30 year mortgage.

A biweekly mortgage is another mortgage loan option you have. A biweekly mortgage shortens the loan term by 18 to 19 years. It requires a payment for half the monthly amount every 2 weeks. By paying on a biweekly mortgage, you will increase the annual amount paid by roughly 8 percent. The shortened loan term will decrease the total interest costs tremendously. The interest costs for a biweekly mortgage will be calculated every 14 days. The amount you pay will hit the principle first, in effect allowing you to chip away at your principle amount first. The disadvantage to a biweekly mortgage is that you have to pay on your home every two weeks. Another disadvantage is that you trade lower total interest costs for fewer mortgage interest deductions on your taxes. In order to qualify for a biweekly loan, you need to qualify for a traditional 30-year mortgage. Many lenders will allow you to convert your biweekly mortgage to a traditional 30-year mortgage without penalty. If you lose your job or your income decreases, you may want to consider converting from a biweekly payment to a monthly mortgage payment.

FHA and VA mortgage loans
The Federal Housing Administration (FHA) and the Veterans Administration (VA) offer several mortgages that may be available to you. The mortgages they offer include 30 year mortgages, 15 year mortgages and ARMs. These government agencies insure the loans and they offer low or no down payment terms. The VA loans are restricted to individuals qualified by military service. The FHA loans are available for all qualified home buyers. FHA loans are wonderful for first-time home buyers because the down payment amount is so small and your FICO score doesn't matter. The main benefit to a VA loan is that you do not need a down payment. A VA loan is guaranteed by the Veterans Administration, but it is funded by a conventional lender.

Interest-only mortgage loans
A new type of mortgage loan is an interest-only mortgage. Interest-only contain an option to make an interest-only payment. The option is only available for a certain period of time. Some mortgages are completely interest only and then require a balloon payment that consists of the original loan balance when the loan reaches maturity. The disadvantage to an interest-only mortgage is that you will be required to make larger payments once you have paid the interest-only portion of the loan balance. You will also be required to make a payment in full once your loan term has ended. Essentially, if you pay interest only payments for 15 years on a 20 year loan, you are only paying 5 years toward the principal amount. When the loan ends in another 5 years, you will need to pay the remaining 15 years of the principal amount at once. This is called a balloon payment.

Other mortgage loans
There are many new types of mortgage loans that are becoming available to homebuyers. A new type of loan is called a two-step, super-seven, or premier mortgage. This loan gives the homeowner the predictability of a fixed rate and an adjustable rate mortgage for a certain amount of time. The time span is usually 7 to 10 years during which the interest rate is adjusted to fit current market conditions. The largest advantage to this loan is your ability to obtain a lower than market rate to begin with. The largest disadvantage to this loan is that you can see your interest rate increase by as much as 7 percent at the end of the 7 to 10 time period.  Another disadvantage to this loan is that the lender can call the loan due with a 30 days notice. This will make your loan similar to a balloon payment, in which you may be scrambling to find the needed money to pay off the balance of the loan. These loans are popular because a standard homebuyer remains in a home for 7 to 10 years before opting to move. If you are a 7 to 10 homeowner, this type of loan is great because you can get a fixed rate loan at a better than market price for a set period of time.

Recently the Lender Buydown loan has become popular. A homebuyer will get a discounted rate initially and it will gradually increase to a set rate over a matter of 3 years. The Lender Buydown gives the consumer lower monthly payments for the first 2 years of the loan. This is great for a first time homebuyer who may need the extra money to furnish the home. The disadvantage to a Lender Buydown loan is that you will get used to smaller monthly payments for two years and a rapid increase in your monthly payment will occur in the third year.

Adjustable Rate Mortgage Loan
An adjustable rate mortgage (ARM) is becoming more and more popular among home buyers. The ARM was developed during a time of high interest rates. The ARM offers low initial rates by sharing the future risk of higher rates between the borrower and lender. An ARM is great during a time of rising income, high interest rates, and short-term homeownership. The main disadvantage to an ARM is that you need to have the needed income to keep up with the irregular and increasing rates.

How to find a good mortgage loan
Now that you know about the different types of mortgage loans, you can begin shopping for a mortgage loan. How do you find a good mortgage loan? Start by taking a look at your income. How much money can you afford to pay each month toward a mortgage? Do you carry any outstanding debt? Can you afford the mortgage on one person's salary? What will happen if you or your spouse loses their job?

You should always shop around and compare rates from several lenders. The lender with the lowest interest rate isn't always the one with the best deal. You also need to consider closing costs and points. Points are additional finance charges that are included in the beginning of a loan. The points can be spread out over the life of the loan or they can be paid up front. If you opt to have the points spread out through the duration of your loan, you will pay interest on interest.

The closing costs are fees that are necessary in order to transfer ownership of a property. Usually the closing costs include the title insurance, title searches, court fees, survey fees, and other additional costs from the lender. The closing costs will vary with each lender, so you need to compare this amount with more than one lender.

Pull your credit report. Your credit report will be a large factor in determining your interest rate. A good credit rating will provide a lower risk to the lender so they can offer you a lower interest rate. Someone with a low credit rating will be turned down or referred to a high risk lender.