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Mortgage Types
When you are buying a home, it is important to understand the mortgage you are applying for. It is a good idea to have an idea what you will qualify for and have a basic understanding of mortgage before you talk to a lender or mortgage broker. This way you can ask the right questions and understand what they are offering. You want to make sure you not only get a good deal, but you have a mortgage you can live with.
The most important aspect of your mortgage is the mortgage type. This determines your payment structure for the life of the loan. You have probably heard of fixed rate and adjustable rate mortgages, but there are many varieties.
Fixed Rate Mortgages (FRM)
FRM’s are the safest type of mortgage. They give you the peace of mind of knowing that no matter what happens to the mortgage market, your payments will never change. If you have good to excellent credit, and plan to stay in your home for the life of the loan, you should insist on an FRM.
Balloon Loan
Even with a FRM, it is important to understand the terms of the loan. A Balloon Payment Mortgage is a type of FRM. Your rate and payment will not change over time, but at the end of the term (usually 3, 5, or 7 years), you will have to pay a balloon payment, the remaining amount of your mortgage. This is meant to give you the opportunity to refinance for a standard FRM at the end of the term, but if you don’t refinance at that time, you will have to come up with the full amount. Not understanding the terms of your loan can cause you to lose your home.
Adjustable Rate Mortgages (ARM)
ARM’s are very common mortgages. If you don’t qualify for a low interest rate FRM, you may consider an ARM to get a better rate. There are many varieties of ARM’s.
- ARM
- You will have a fixed payment for a period of time, but at the end of each period your payment will adjust according to current rates. The adjustment may occur once a month, quarter, 1 year, 3 years, or 5 years.
- Fixed Period
- Your payment will be fixed for a period of typically 10 years, and then it will adjust yearly.
- Two-Step
- Your payment will be fixed for 5 to 7 years, then adjust and remain the same for the rest of the loan.
- Convertible
- Your loan starts off as an ARM, but can be converted to an FRM at some predetermined time.
- Graduated Payment Mortgage
- Your payments will start out low and gradually increase over 3 to 5 years to a predetermined payment. This allows you to get a larger mortgage than you would otherwise qualify for.
SubPrime Loans
Do you have:
- A recent bankruptcy
- Excessive debt for your income
- Bad Credit
- A foreclosure
If you answered yes to any of these, you may be a subprime borrower. This just means you may not qualify for a FRM, and you may have to borrow at a higher interest rate (which gives you a higher payment).
How can you get a better loan? There are several ways you can improve your credit and standing with your lender.
- Never be later or miss a payment. Automatic payment withdrawal can prevent this and may lower your interest rate a little.
- Keep your home in great condition, and make whatever improvements you can. This will raise the value of the home and lower your debt to value ratio.
- Work on paying down your total debt. If you have credit cards or student loans, paying these down is the most important step to qualifying for a better loan.
After a 2-5 years, you will be able to refinance for a lower interest FRM.
Understand what types of loans you qualify for and what type suits your financial situation best.
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May 5th, 2008 at 1:44 am
[…] Johnson explains the difference between several types of mortgages. I always get my balloons mixed up with my […]
May 13th, 2008 at 7:24 pm
[…] Johnson presents Mortgage Types posted at christopheraaronjohnson.net, saying, “First in a series about buying a […]