There are several choices available when you are ready to inquire about a mortgage loan. The language in the financial industry can become confusing, and, if you not familiar with your choices then you can find your head spinning. It is important to do some research and become familiar with the mortgage loan lingo before you start searching for the right loan. Here are a few pointers that can assist you in understanding the mortgage loan and finding the right one for you.
Fixed Rate Mortgages
Older generations will probably refer to the good old days and fixed rate mortgages when it comes to home loans, while a younger person might be scratching their head and wondering what a fixed rate mortgage is. A traditional fixed rate mortgages boils down to a home loan with a fixed rate over a specific term. Whatever term is chosen for a fixed rate mortgage, be it a 15-year or 30-year term, the size of the loan payment stays the same throughout the whole term.
When trying to figure out what a fixed rate mortgage is and if it is right for you, it is best to keep in mind that the more that you put down, the lower your monthly payments will be. Although a lot of people tend to go for trendier loans, fixed rate mortgages guarantee a low monthly payment so some people consider these loans to be financially savvy.
Adjustable Rate Mortgages
When interest rates rise, so does the demand for adjustable rate mortgages. These mortgages help homeowners afford their homes by lowering the interest rate for a period of 1 to 5 years before they are adjusted to the prevailing market rate at set intervals. For instance a 3/1 ARM is fixed for three years at a low interest rate. After this initial period of fixed rate, the interest rate is adjusted every year. The adjustment is usually tied to a specific index and can also vary a bit from mortgage to mortgage.
You will still need to have a good credit history to be eligible for an ARM. They will look at things like your payment history, your outstanding debts and your ability to pay loans back to creditors. Having a payment history and good credit is helpful in establishing your ability and willingness to pay back your debts.
These loans can be very good, but incur some risk to the borrower. When the adjustable rate kicks in, the subsequent rise in mortgage payments can be a shock for the homeowner. Hopefully, you will have prepared in advance and have your finances together. If not, you may be forced to sell your home in order to avoid defaulting on the loan.
Some people like adjustable rate mortgages when they know they are not going to be in a property longer than the period of the fixed rate (between 1 to 5 years). If they are certain they will be moving, an adjustable rate mortgage makes sense. It provides a lower move-in cost with relatively little risk that the homeowner will have to pay the larger payments later.
Farm Loans
Choosing the correct farm loan can be difficult and challenging. To understand the overall picture of the loan, you must first understand that a farm mortgage consists of more than just interest. A farm loan consists of closing costs, points, and quoted rate. The points equal the percentage of the farm loan amount. This percentage is used in the formula to determine the interest rate of the loan. When you are comparing different farm loans from different lenders, make sure you compare the associated points. The total amount that the farm loan will actually cover will include escrow fees, form loan related fees, and title.
Make sure when you’re putting together a farm loan you inquire with different lenders to compare their loans. You can compare the requirements for down payments, credit, mortgage insurance payments, interest, etc. Pay close attention to conversion options and prepayment penalties.
The lock-in period of the loan is the time where the interest rate and quoted points will be guaranteed; you should be sure to compare this period between different loans. Typically the lock-in period is 30-60 days, but look carefully because some institutions only offer a short period. It is important that you understand the longer the lock-in period is the higher price the farm loan ends up being. Make sure to factor in other fees the farm loan will have like tax services, wire transfers, mortgage insurance or any other fees that the lender might have.
Commercial Mortgages
A commercial mortgage is a mortgage used on a building that is to be used for a business. The only real difference between this and a standard mortgage is that these are used for businesses. If the business has secured credit, the credit of the business is then used for the loan; otherwise the individual applying for the mortgage’s credit will be weighed in.
These mortgages can either have fixed or variable interest rates. With fixed interest you will always be aware of what you’re paying but with variable interest sometimes the payments may be lower and other times they may be higher. The choice is really up to what you and the lender think will be better for the business. If you do choose a fixed rate, you will have the option of refinancing your loan if rates lower.
If you are applying for a commercial mortgage, be sure to come to the lender with all of your necessary documentation and be sure that all of your financial information is prepared. For a start up business, all of your financial information will need to be there as well as a complete business plan including your business’ projected finances. In addition, you should be prepared to bring both the business’ and your (if you’re the business owner) income tax documents.
This mortgage is essentially no different from a standard mortgage; the only difference is that in order to get the loan for your business, you will need to have documentation to prove that your business is not going to flop. That is why the business plan is needed if your company is not already well established. These loans are risky for lenders, so if you really desire a mortgage of this type you will need to make sure that you have given the lender enough information and reason to give you the loan.
Accelerator Mortgages
Different mortgage types are abundant and it can sometimes be overwhelming when trying to decide which is the best for you, your family, and your current financial situation. Until recently accelerator loans were mostly used in the U.K. and Australia but now they are becoming more and more common in the United States.
Accelerator loans use home equity borrowing and the borrower’s paychecks to shorten the amount of time it takes to pay off your mortgage loan. This can ultimately end up saving you thousands of dollars in interest. With this type of mortgage you will be required to deposit your paychecks into an account in which, at the end of the month, every unused penny will be applied to the mortgage balance.
About a quarter of those in the United Kingdom and Australia are using these types of mortgages. As of now, only two companies are offering them in the U.S. These companies are set up for you to purchase or refinance with your home equity credit lines. Your monthly payments are then determined by the amount of money that you’ve left in the account each month.
The average balances carried on these types of loans are much less than the average home loan. Even if nothing is put toward the balance, you will still be on interest. If you are interested in taking out an accelerated mortgage loan, you should search the web and see if they are available in your area and what the available interest rates are. You can also locate a mortgage calculator for the companies that do offer these.
Single Premium Mortgage Insurance
We’ve told you about the different types of mortgages and have mentioned mortgage insurance. Having mortgage insurance is a plus because it ensures the lender will be taken care of in the event of an emergency. Here is a deeper look into another type of mortgage insurance, Single Premium Mortgage Insurance. With this type of mortgage insurance, the borrower pays with one single payment at closing.
The name single premium refers to the mortgage insurance being financed as a portion of the loan amount, meaning you will not have to pay upfront. With this type of insurance you are offered special tax advantages and it could provide you with a lot of monthly savings. Another advantage of single premium insurance is that when the borrower chooses to cancel the insurance or sell the home; any unused part of the premium is refunded.
Since you are taking out a loan with a lower monthly payment, you will most likely be able to take out a larger loan then you’d normally be able to. This is a boon because taking out a larger loan means more tax deductions. This type of insurance can also be used for life insurance plans. If you are looking to protect yourself in the event of emergencies, look into mortgage insurance and see which one suits you the best.
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