
Mortgage
Information
Fixed rate mortgages
You pay a predetermined interest rate for the duration of the
mortgage. You generally have a choice of a 15 or 30year mortgage
(though terms may vary to meet your needs). You pay more interest
over the term of the 30year mortgage but your monthly payments are
lower. With the 15year mortgage, you have higher monthly payments
but you build up the equity in your home much sooner.
Note:
It's generally easier to get approved for a 30year
mortgage. In addition, you can buy a more expensive home with a
30year mortgage than a shorterterm mortgage because with loan
payments of equal size, you can borrow more.
Adjustable rate mortgages (ARMs)
With an ARM, the interest rate stays fixed for the
initial loan term, then adjusts up or down based on a specified index rate. The rate and monthly payment change once
every 6 or 12 months with most ARMs. ARMs usually come with initial rates one to three percentage
points below those of 30 and 15 year fixedrate loans. There are
several questions you should ask your lender before getting an ARM:
How is the rate figured?
The rate you pay on an ARM is based on the selected index rate
plus a fixed extra amount called a margin. For example, if the
index rate is 5% and your margin is 2.5%, your interest rate
will be 7.5%. Find out what index your lender uses and what the
margin is.
How often can monthly payments change? Depending on the
program, your monthly payments can move up or down monthly,
twice a year or annually. Most ARMs allow only annual payment
changes.
Does the ARM include caps? Most ARMs have limits (caps)
that restrict the size of the interest rate or monthly payment
changes.
Is the ARM convertible? Some ARM programs allow you to
convert from an adjustable rate to a fixed rate and payment.
Are there any prepayment penalties? Many ARM programs
allow you to prepay your loan in whole or in part without
penalty.
Balloon Loans
A balloon loan has a large remaining balance at the end of
the loan term — sometimes almost as much as the original loan
amount. Balloon loans often have short terms between three and
five years and can be risky if you do not have enough cash or
cannot refinance in time to repay the debt.
Points
Mortgage price tags come in two parts. One cost is the
interest rate; the other is points. A point is equal to one
percent of the mortgage amount. With a $100,000 mortgage, one
point would be worth $1,000. Generally, if you pay more points,
you'll have a lower interest rate, or if you pay fewer points
you'll have a higher interest rate. To determine which option is
best for you, you'll need to estimate how long you'll own the
home and decide the amount of the extra points by the dollar
amount you would pay additional each month with the higher rate.
For example: You can pay one point ($1,000) at closing or no
points, but $18 more each month because of a higher interest
rate. If you own for more than 4½ years, the higher upfront
payment actually represents the better deal ($1,000 divided by
$18 equals 55.55 months or 4.5 years).
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