Shopping for the Best Mortgage
Mortgage rates are on the rise, but historically speaking
they are still fairly low. As a result of the favorable mortgage
market, lenders have produced several new creative financing
options for purchasing or refinancing. Don't let the confusion
of mortgage options keep you from a new home or lower interest
rate. Here is an introductory lesson to the four most common
types of home loans.
Fixed-rate Mortgages
Fixed-rate mortgages have a fixed interest rate over the
lifetime of the loan, usually between 10 and 30 years (40-year
fixed-rate mortgages are also slowly increasing in popularity).
This means that the amount you pay each month is fixed, too.
It's a great mortgage choice if you want the reassurance
of predictable loan expenses for the life of your mortgage.
Adjustable-rate Mortgages
This type of mortgage usually starts out with a lower interest rate (and therefore
lower payments) than with a fixed-rate loan. However, your interest rate
and monthly payments are dependent on market interest rates. The interest
rate is usually adjusted annually, but depending on your loan package the
adjustment period on your ARM may be as low as one month. Increases in the
interest rate are capped for each year, and for the lifetime of the loan.
For example, an ARM interest rate might have an annual cap of 1.5% and a
cap over the lifetime of the loan of 6%. Adjustable-rate mortgages are a
good option if you're planning to own the property for only a few years,
or if you expect your income to increase over the years so you can comfortably
afford higher payments if interest rates should rise.
Balloon Mortgages
Balloon mortgages typically have a lower interest rate than fixed-rate mortgages
(and hence may be easier to qualify for), however the loan is payable in
full after five to seven years. A balloon mortgage is a great option if you
know you'll be selling the property before the balloon payment is due, and
you're not comfortable with an adjustable-rate mortgage.
Jumbo Mortgages
A jumbo mortgage is simply one which is larger than a typical mortgage. The
2006 limit for a traditional (or conforming) loan is $417,000, and any amount
over this figure is considered a jumbo (or non-conforming) mortgage. This
type of mortgage usually has a higher interest rate than a conforming loan.
Getting Mortgage Quotes
To get the best possible rates, aim to contact several lenders or more. Keep
all your inquiries to within a 14-day period to prevent your credit score
(also known as a FICO score) from being negatively impacted by too many credit
inquiries. Most inquiries that take place within a 14-day stretch of time
are counted as one inquiry. It's wise to shop for a mortgage before you start
house-hunting. Mortgage pre-approval is one of the best bargaining tools
you can have when it comes to negotiating a sales price. Plus, it'll save
you valuable time at closing.
In Closing
Always pay attention to your bottom line cost. (How much is the
loan costing you.) Your truth-in-lending statement can help you
realize what the actual cost will be. Many lenders offer low
interest rates and raise the origination charges and buy down
points to make up the difference in discounts on interest rates
and up front cost. Watch for pre-payment penalties some times
they can be brutal. Prepayment penalties are just another method
for lenders to recover the loss of discounting the loan. |
