The dictionary defines mortgage, as “a conveyance of or lien against property (as for securing a loan) that becomes void upon payment or performance according to stipulated terms”.
There are many features to consider when securing a home loan. You’ll want to consider the size of the mortgage, method of repayment, interest rate and maturity of the loan.
Fixed Rate Mortgage
75% of all mortgages are fixed rate, it’s the mainstay of the home loan industry. They’re popular because they’re predictable. Borrowers are able to repay the loan in equal monthly portions. As interest rates fluctuate, a fixed rate offers stability and security.
Fixed rate loans are commonly written for 10, 20 or 30 years. The loan is amortized, which means, payments for the first few years are applied to the interest. If you want to reduce the time off the loan, pay extra on your payment and have the additional portion applied to the principle.
FHA backed loans were started in 1935, but declined in popularity in the 1990’s. The housing prices had exceeded FHA loan limits. But they regained popularity in 2005.
The FHA insures loans, minimizing the risk to the lender. People with less than perfect credit scores can benefit from an FHA backed loan.
These loans can be available to people, two to three years after a bankruptcy. It is also possible to obtain an FHA backed loan a few years after a foreclosure, if your credit is in good shape.
The advantage with an FHA backed loan is that the insurance is funded within the loan and added to the monthly payment, costing less than private insurance.
Adjustable Rate Mortgage (ARM)
An Adjustable Rate Mortgage will fluctuate as interest rates increase or decrease. The rate is determined by the market index (can also be LIBOR, Prime Rate, etc.).
Quite often, the loans start with a lower monthly payment. The risk is ending up with unaffordable monthly payments. To manage your risk, consider setting a “cap” limiting the adjustability:
• Interest Rate Cap
• Monthly Payment Cap
• Cap on the Number of Years Before the Rates Change
• Lifetime Cap
Types of ARM loans
10/1 – The rate is fixed for 10 years after which the rate adjusts annually.
5/5 – The rate doesn’t change for five years and adjusts every five years.
5/1 – No change for five years, then adjusted annually (You can also get a 3/3 or a 3/1 ARM loan.)
Balloon Loan – This loan has lower monthly payments which are balanced out by a large balloon payment at the end.
Give our agents at the Tim Wood Group a call. They can sit down and advise which type of loan is right for your new home purchase.
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