www.LoanStarLending.com In taking control of your finances, choosing the right mortgage
in your home buying pursuit is essential. Choosing the wrong type of
mortgage can cost you thousands of dollars as well as many serious
headaches.
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Although there may appear to be many different types of mortgages, essentially there are two types: the fixed rate (FRM) and the adjustable rate mortgages (ARM).
The FRM means that the payment is set at the beginning for the life of the mortgage and is paid off at the end of the term. A key feature of the FRM is at the beginning your payment is mostly interest, but the principal portion gradually rises over time. The interest on your payments, which represents a tax deduction, can be attractive to you as a saving on your tax obligation.
Also you will find that the length of the FRM can be 10, 15, 20, 25, 30 years with the 15 and 30 year mortgage being the most common. In this era of historically low interest rates, I recommend the 30 year FRM and then show how the 30-year FRM can be reduced to a 15-year one by pre-paying the interest with a separate check at the beginning of the year. This effectively reduces the mortgage by one month each time this is done.
The other type of mortgage is the ARM. This mortgage is one in which the interest rate is not fixed at the beginning of the mortgage. That is, the rate may change based on the movement of the interest rate index. Consequently, be sure that your adjustable rate mortgage has adjustment and lifetime caps. The adjustment cap protects you from wild rates swings and also protects the lender from a mortgagee who may suddenly find the mortgage payment unaffordable. Again, the adjustment cap is important in that at any single adjustment the rate can increase no more than the percentage set out at in your original mortgage note. Another type of cap is the lifetime cap or the maximum that your rate can rise throughout the life of your loan. The most common interest-rate cap is 6.00% above your starting rate although some conventional and most government adjustable rate mortgages may be 5.00%.
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In conclusion, often you will find the popular hybrid mortgage being quoted as an alternative to the FRM. While the hybrid is still an ARM, it acts like a FRM in the first few years and then changes into an annual ARM. Common hybrids are fixed for three years and five years. You will see them listed as 3/1, 5/1, 7/1, and 10/1 indicating how long the interest rate is fixed and how often the loan adjusts after that period. As an example, a 3/1 ARM is fixed for three years, then turns into a one-year ARM. The hybrids are popular because they have a lower starting rate than FRMs but also provides with some added security by you knowing what your rate would be in the future.
Although there may appear to be many different types of mortgages, essentially there are two types: the fixed rate (FRM) and the adjustable rate mortgages (ARM).
The FRM means that the payment is set at the beginning for the life of the mortgage and is paid off at the end of the term. A key feature of the FRM is at the beginning your payment is mostly interest, but the principal portion gradually rises over time. The interest on your payments, which represents a tax deduction, can be attractive to you as a saving on your tax obligation.
Also you will find that the length of the FRM can be 10, 15, 20, 25, 30 years with the 15 and 30 year mortgage being the most common. In this era of historically low interest rates, I recommend the 30 year FRM and then show how the 30-year FRM can be reduced to a 15-year one by pre-paying the interest with a separate check at the beginning of the year. This effectively reduces the mortgage by one month each time this is done.
The other type of mortgage is the ARM. This mortgage is one in which the interest rate is not fixed at the beginning of the mortgage. That is, the rate may change based on the movement of the interest rate index. Consequently, be sure that your adjustable rate mortgage has adjustment and lifetime caps. The adjustment cap protects you from wild rates swings and also protects the lender from a mortgagee who may suddenly find the mortgage payment unaffordable. Again, the adjustment cap is important in that at any single adjustment the rate can increase no more than the percentage set out at in your original mortgage note. Another type of cap is the lifetime cap or the maximum that your rate can rise throughout the life of your loan. The most common interest-rate cap is 6.00% above your starting rate although some conventional and most government adjustable rate mortgages may be 5.00%.
In conclusion, often you will find the popular hybrid mortgage being quoted as an alternative to the FRM. While the hybrid is still an ARM, it acts like a FRM in the first few years and then changes into an annual ARM. Common hybrids are fixed for three years and five years. You will see them listed as 3/1, 5/1, 7/1, and 10/1 indicating how long the interest rate is fixed and how often the loan adjusts after that period. As an example, a 3/1 ARM is fixed for three years, then turns into a one-year ARM. The hybrids are popular because they have a lower starting rate than FRMs but also provides with some added security by you knowing what your rate would be in the future.
Will Barnes, Business-Financial Consultant, for over thirty-eight
years has helped individuals and families make sound decisions in the
areas of home buying, planning for the children's education, protecting
one's family and business, and planning for a secure retirement.