What kind of mortgage should you select?

 

There are two major types of mortgage loans — those with fixed interest rates and monthly payments and those with changing rates and payments. However, there are many variations of these plans on the market, and you should shop carefully for the mortgage that best suits your needs.

Common fixed-rate mortgages include 30-year, 15-year, and bi-weekly mortgages. The 30-year mortgage usually offers the lowest monthly payments of fixed-rate loans, with a fixed monthly payment schedule.

The 15-year fixed-rate mortgage enables you to own your home in half the time and for less than half the total interest costs of a 30-year loan. These loans, however, often require higher monthly payments.

The bi-weekly mortgage shortens the loan term from 30 years to 18 to 19 years by requiring a payment for half the monthly amount every two weeks. While you pay about 8 percent more a year towards the loan’s principal than you would with the 30-year, one-payment-per-month loan, you pay substantially less interest over the life of the loan. Keep in mind, however, that with shorter-term loans, you trade lower total costs for smaller mortgage interest deductions on your income tax.

Mortgages with changing interest rates and/or monthly payments exist in many forms. The adjustable rate mortgage (ARM) is probably the most common, and there are many types of ARM loans available. The ARM usually offers interest rates and monthly payments that are initially lower than fixed-rate mortgages. But these rates and payments can fluctuate, often annually, according to changes in a pre-determined “index” — commonly the rate of return on U.S. Government Treasury bills.

Some adjustable loans, for a fee, contain a provision permitting you to convert later to a fixed-rate loan. Another type of mortgage loan carries a fixed-interest rate for a number of years, often seven, before adjusting to a new interest rate for the remainder of the loan. A “buydown” or “discounted mortgage” is another type of loan with an initially reduced interest rate which increases to a higher fixed rate or to an adjustable rate usually within one to three years. For example, in a “lender buydown,” the lender offers lower monthly payments during the first few years of the loan.

What features should you compare with different mortgage loan packages?

Probably the single most important factor to look for when shopping for a home mortgage is the annual percentage rate, or the “APR.” The APR includes all the costs of credit, including such items as interest, “points” (fees often charged when a mortgage is closed), and mortgage insurance (when included in the loan). Lenders must disclose the APR under the Truth in Lending Act. The lower the APR, generally the lower the cost of your loan. Advertisements that state other rates such as “simple” interest rates, do not include all the costs of the loan. When it comes to finding a moving solution for you, consider it moved nyc is here to help.

If you shop for a mortgage loan with interest rates or payments that change, be sure to compare:

* initial interest rates;

* the “cap” — or how much the interest rate can increase/decrease over the life of the loan, and how much the rate can change at each adjustment;

* how often the interest rate can change;

* how much and how often the monthly payments and term of the loan can change;

* what index is used to determine the rate changes;

* what “margin” is used — or how much additional a lender can add to the adjusted interest rate;

* the limits, if any, on “negative amortization” — the loss of equity in your home when low monthly payments do not cover fully the interest rate charges agreed upon in the mortgage contract; and

* any “balloon” payments — a large payment at the end of your loan term, often after a series of low monthly payments.

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