A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. Whether you are searching for the best rates for home loans, home equity, or refinancing, you can be assured you will find them here!
|1) Fixed Rate Mortgage|
|2) The Adjustable Rate Mortgage (ARM)|
|3) Interest Only Mortgage|
|4) Biweekly Mortgage|
|5) Two Step Mortgage|
|6) Federal Housing Authority (FHA) Mortgage|
|7) Veterans Affairs Loan|
Fixed Rate Mortgage
This is the most common type of residential home loan. The mortgage loan is repaid through fixed monthly payments of principal and interest over a set term. The borrowing rate stays the same over the life of the residential mortgage loan. The term of the home mortgage can be 10, 15, 20 or the popular 30 year fixed rate mortgage term. The way fixed mortgage loans are structured, the mortgage interest is front loaded. In the first years of the residential loan, the bulk of the monthly payments go to paying mortgage interest. It's only later that you will start significantly building equity in your home as more of your mortgage payments go towards paying down the mortgage loan principal. A fixed rate mortgage is ideal for those who intend to stay in their properties for a long time.
These are the most popular types of mortgages as well as the most predictable. The rate you agree to at the beginning of the mortgage is locked in for the life of the mortgage. Your monthly payments are predictable, which helps you budget for the long-term. If you get a fixed-rate mortgage when rates are high, you can always refinance when rates drop.
Interest rates on fixed-rate loans are higher than other types of mortgages, so your monthly payments are higher. If interest rates drop and you want to refinance, you must pay closing costs to do so.
The Adjustable Rate Mortgage
The term Adjustable Rate Mortgage is essentially used in countries like the United States and Britain whereas in India it is better known as the 'floating rate', which means the same thing with minor situational variations.
Adjustable rate mortgages (ARMs) are home loans with a rate that varies. As interest rates rise and fall in general, rates on adjustable rate mortgages follow. These can be useful loans for getting into a home, but they are also risky. This page covers the basics of adjustable rate mortgages.
ARM Mortgage Examples Assume you have a periodic cap of 1% per year. If rates rise 3% during that year, your ARM mortgage rate will only rise 1% because of the cap. Lifetime caps are similar. If youve got a lifetime cap of 5%, the interest rate on your loan will not adjust upward more than 5%. Keep in mind that interest rate changes in excess of a periodic cap can carry over from year to year. Consider the example above where interest rates rose 3% but your ARM mortgage cap kept your loan rate at a 1% increase. If interest rates are flat the next year, it's possible that your ARM mortgage rate will rise another 1% anyway -- because you still 'owe' after the previous cap. There are a variety of ARM mortgage flavors available. For example, you might find the following:
10/1 ARM Mortgage - the rate is fixed for 10 years, then adjusts every year (up to the cap, if any)
7/1 ARM Mortgage - the rate is fixed for 7 years, then adjusts every year (up to the cap, if any)
1 Year ARM Mortgage - the rate is fixed for one year then adjusts annually up to any caps.
Teaser Rate: This is the starting interest rate of the arm adjustable rate mortgage. It is usually referred to as the teaser rate, since it is lower than the fully indexed rate. The initial low mortgage rate is used to attract people. An arm mortgage is ideal for people who intend to stay in their homes for no more than 5 to 7 years. The benefits of an arm are realized at the beginning.
Affordability: If current mortgage rates and housing prices are high, this may be the only home loan option available to you. You may have a better chance of getting the home loan since the lender incorporates the gross monthly income and the monthly loan payment amount to determine how much you qualify. The monthly amount will be less with a lower interest rate so you might qualify for more.
Interest rates have peaked: By going with an adjustable rate mortgage arm at the peak of the interest rate cycle, the successive rates will be lower as interest rates go down. Your monthly home mortgage payments will be lower.
Complicated to understand: Unlike a fixed rate mortgage that is simple to understand, there are many variables that go into calculating adjustable rate mortgage loans.
Interest rates have bottomed out: By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. Your monthly mortgage payments will become less affordable.
Uncertainty: If you plan to be at your property for more than 7 years, you will be dealing with the uncertainty associated with an ARM mortgage. After each adjustment period, you will bet getting new mortgage payments.
Interest Only Mortgage
In an interest-only mortgage, the borrower only pays interest (plus property taxes and homeowners insurance) on the loan. This usually results in a lower monthly mortgage payment. The borrower does have the ability to pay extra towards the principle.
Not Interest Only For The Whole Mortgage Loan Term
The interest only payments do not go on for the whole term of the home loan mortgage. Interest only mortgage payments periods range from 1 year up to half the term of the mortgage loan. Interest only loan mortgages are available in adjustable rate mortgage format and fixed mortgage format.
Bigger Monthly Mortgage Payments
After the interest only payment is over, you will begin making payments on your mortgage principal. Your monthly mortgage payment will go up considerably. For example, you took out a 15/30 year interest only mortgage. After the 15th year, the principal balance will be amortized over 15 years. With a $175,000 home loan with a mortgage borrowing rate of 6.50%, the interest only monthly payment is $947.92. When the principal payments kick in after the 15th year, the mortgage monthly payment jumps to $1,524.44.
The low monthly mortgage payments are very attractive. With an interest-only mortgage, you often qualify for a higher loan amount.
Income Risks: There are no assurances that your income will rise fast enough to cover the higher monthly mortgage payments.
Property Risks: Instead of the property rising fast enough to pay off your interest only home mortgage, it could stay at current levels or even drop. As a result, you might require another loan just settle the interest only mortgage loans.
No guarantee of getting superior returns in other investments: If you used the money to generate returns in investments such as equities and mutual funds, there is no guarantee you'll make money.
A Biweekly Mortgage is a payment plan where the borrower makes payments toward his principal and interest every two weeks instead of once monthly. The Biweekly payment is exactly one half of the amount a monthly payment would be. The savings a Biweekly Mortgage payment plan creates are often astounding, though they can be misleading.
Almost anybody with a mortgage will tell you that they would do almost anything to have their mortgage paid off early. For this reason, many people choose to pay their mortgage biweekly instead of monthly. If you use this method you will spend less in interest and take years off of your mortgage term.
Example: 30 year fixed mortgage $175,000 Interest Rate: 6.75%
By opting for a bi weekly mortgage payment plan for this mortgage, you will be saving $54,257.52 in mortgage interest. Your mortgage will be paid off 5 years 9 months earlier.
Two Step Mortgage
A two step mortgage is essentially a 30 year mortgage with special features: Convertible or non-convertible. These mortgage loans are also known as 5/25s and 7/23s. The 5/25s has a fixed interest rate for the first five years and then switches to either a 25 year fixed mortgage rate or a 1 year adjustable mortgage rate. The 7/23 has a fixed interest rate for the first seven years and then converts to a 23 year fixed or a 1 year adjustable. The starting home loan rate is lower than a 30-year fixed. However, it is higher than a 1-year ARM mortgage. This type of residential mortgage is less risky than a mortgage ARM initially since the adjustment interval is longer.
Federal Housing Authority
A FHA mortgage is a residential loan insured by the FHA that is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans have lower mortgage down payment requirements and were easier to qualify for than conventional loans. The goal of the FHA is to make housing affordable and stimulate demand.
The best feature of an FHA loan is the low down payment. FHA loans are also assumable so you can take over from the property seller if you qualify. This could save you significant amounts of money and hassles. The FHA mortgage loan amounts are determined by the median prices of different cities within a specific region.
Veterans Affairs Loan
VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA). The loan may be issued by qualified lenders.
The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities.
VA loan guarantees offer veterans several options. Though most are used for the purchase of existing homes, the program is available for construction of new homes and refinancing of existing mortgages. In some cases, such as to increase energy efficiency, a VA loan can be taken out to improve a home at the same time the home is purchased. It is also possible for a veteran to obtain VA guaranty on a loan for a manufactured home and lot.
Refinancing may be undertaken to reduce interest rate/interest costs (by refinancing at a lower rate), to extend the repayment time, to pay off other debt(s), to reduce one's periodic payment obligations (sometimes by taking a longer-term loan), to reduce or alter risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to raise cash for investment, consumption, or the payment of a dividend.
In essence, refinancing can alter the monthly payments owed on the loan either by changing the loan's interest rate, or by altering the term to maturity of the loan. More favourable lending conditions may reduce overall borrowing costs. Refinancing is used in most cases to improve overall cash flow.
Another use of refinancing is to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various indices used to calculate them. By refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate over time. This flexibility comes at a price as lenders typically charge a risk premium for fixed rate loans.
In the context of personal (as opposed to corporate) finance, refinancing a loan or a series of debts can assist in paying off high-interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home mortgage. This can allow a lender to reduce borrowing costs by more closely aligning the cost of borrowing with the general creditworthiness and collateral security available from the borrower. For home mortgages, in the United States, there may be certain tax advantages available with refinancing, particularly if one does not pay Alternative Minimum Tax.
As a general rule, refinancing home mortgages truly only works if the interest rates are low, and if it saves lots of money which would have else been used to pay off the monthly recurring bills on the current loan. In addition, by refinancing home mortgages one is able to get better credit because he will be able to make your payments quicker.
Should You Consider Mortgage Home Refinance? Are the current mortgage interest rates at least 1 point less than your existing mortgage interest? If so, refinancing your home mortgage might make sense. If interest rates are lower now by 2 points or more than when you bought your home, you should definitely look into refinancing.
Do you currently have an adjustable rate mortgage, negative amortization or interest only loan that is due to reset or which isn't building equity? If so, today's historically low mortgage interest rates make it a great time to refinance a home loan and lock in low rates on a standard mortgage refinance loan with a fixed interest rate.
Do you have at least 20 percent or more equity in your home? If so, you might benefit from refinancing by reducing or eliminating the Private Mortgage Insurance (PMI) that you are paying each month. PMI is a type of insurance that is required in many loans where the buyer didn't make a down payment. of 20% or more. In exchange for less money down, PMI provides additional insurance to lenders in the event of a default. But if you now owe 80% or less on your mortgage, you may be able to drop the PMI and that can reduce monthly payments by $70 to $150 or more.