Types of Mortgage
There are now many different kinds of mortgage available. The most common types are fixed rate mortgages and adjustable rate mortgages (ARMs). There is also a wide range of other features to consider when choosing a mortgage such as points, closing costs, prepayment penalties, etc.
Not only are there a wide assortment of mortgages available, but there are also a lot of different companies offering the loans. These range from high street banks and credit unions, to online-only banks, such as ING DIRECT, Capital One, and specialist mortgage companies.
A new kind of website now emerging on the internet gives you a range of mortgage quotes from several different providers. This can spare you a lot of time as you will only need to enter your details once. It also means that the banks and other mortgage providers are also competing directly against one another for your business, which may mean that you could get a better deal.
Other Mortgage Options
With interest rates currently so low, many people are now considering refinancing their existing mortgage. This is taking out a new loan, usually at a lower interest rate, to cover your previous mortgage. This has the effect of decreasing your monthly payments.
It may also be possible to take out a second mortgage. This is taking out a second loan without first fully paying off your original mortgage. Many people may want to do this, for example, in order to pay off high-interest credit card debt.
Fixed Rate Mortgage
Fixed rate mortgages are currently the most common type of mortgage available.
With a fixed rate mortgage, both your interest rate and monthly payments remain the same throughout the length of your loan. This gives you the stability of identifying what you will have to pay each month rather than risking a rise in your monthly payments as the interest rate increases.
You can apply for fixed-rate mortgages that last for various lengths of time. The most common periods are 15 and 30 years. However, it is also possible to get loans for different lengths of time, such as 20 years.
In general, the shorter the length of the loan, the lower the interest rate will be. A 15-year loan will usually have a lower rate than a 30-year loan, for example
You can often lower your interest rate on a fixed rate mortgage by purchasing points. A point is equal to 1% of your loan amount. For example, if you are borrowing $150,000, it will cost you $1500 to buy each point.
You pay for the points up front in order to reduce the interest rate for the duration of the loan. If you aim to stay in your house for a long time without paying off your mortgage early and can afford the points up front, it may be beneficial to buy points in order to decrease your mortgage rate.
Adjustable Rate Mortgage
Adjustable-rate mortgages (ARMs) have been becoming increasingly popular in recent years.
Unlike fixed rate mortgages, the interest rate for ARMs varies along with the current market interest rate. This means that not only does the interest rate vary but so does your monthly payment. Your monthly payment could change either down or upwards, making you better or worse off. Before you take out this kind of loan, you should be aware of the risk that your monthly payments may well rise in the years to come.
Advantages of ARMs
There are several advantages to taking out an ARM, in order to counterbalance the additional risks associated with adjustable rate mortgages. Firstly, the initial interest rate is often a substantial amount lower than the equivalent fixed rate mortgage. This makes your monthly payments lower in the earliest years of your mortgage – usually when money is at its tightest.
Also, you may have seen ARMs referred to as 3/1 ARMs, 5/1 ARMs, etc. This means that these lower interest rates are actually fixed for the first part of the loan. For example, with a 3/1 ARM, the initial interest rate is fixed for the first three years of the loan; for a 5/1 ARM, it is fixed for five years, etc. This gives the combined advantages of the lower initial interest rate with the security of knowing your payments for the first few years.
Some Adjustable rate mortgages may also offer a cap to the interest rate. This means that even if the market interest rate increases substantially, you have the peace of mind knowing that there is a limit to the increase in your monthly payments.
Closing costs are another thing to be considered when deciding on a mortgage. Closing costs are fees that you have to pay when you receive your mortgage and complete buying your house. It is important to consider these as it is the money you need upfront together with the deposit for your house. You should make sure you have enough money saved to cover your closing costs as well as your deposit
Closing costs consist of a number of different fees. The included fees and how much they are will vary from lender to lender and even between different loans. Your lender should give you an estimation of your closing costs during the loan application process.
Fees that may be part of your closing costs include loan origination fees, administration fees, broker fees, and many others. You may also have to pay property tax and homeowners insurance upfront as part of your closing costs too.
If you have chosen to buy points on your mortgage in order to reduce your interest rate, you will also pay these as part of your closing costs. Each point will cost 1% of your loan amount. For example, if you are borrowing $500,000, each point will add $5000 to your closing costs.
With the increased competition between mortgage providers, some loan companies are now offering loans with low closing costs. For example, ING DIRECT offers an adjustable rate mortgage with low closing costs and no points.
To summarise, ARMs may offer several benefits, but they also entail a slightly increased risk. They can be particularly suited to those wishing to pay off their mortgage early or those not planning to stay in their house for too many years, as these people can benefit from the lower fixed period at the beginning of the loan without going into the riskier adjustable part of the loan.