Sixth Degrees of Mortgages
Okay so you have found the house of your dreams. You have
calculated your finances to ascertain how much you can spend
and precisely how much you have to put down on the property.
You are familiar with your credit standing and are prepared
to enter into an agreement via which you will make regular
payments toward the purchase of your new home. Now what?
Well, first it is best to understand how mortgages works
and the various types of loans that are available on the market.
By learning of the varying forms, you will not only gain a
broader sense of how interest rates come into play but be
able to devise a plan for keeping your costs at a reasonable
amount for the entire length of you mortgage.
Fixed-Rate Mortgage
This is probably the most basic form of mortgage available
on today’s market. The borrower will be in debt for
a specified portion of the loan based upon the interest rate
of the associated loan agreement. The amount accrued on account
of interest will never fluctuate. Hence, your monthly stipends
will remain consistent over the lifetime of the loan. Typically,
loan terms are for either 15 or 30 years periods.
Adjustable Rate Mortgage
Term refers to how the loan’s associated interest rates
change in accordance with the financial markets as a whole.
Hence, the economy plays a significant factor in whether your
rates go up or down.
The introductory year rate (often termed the teaser rate)
tends to be several percentage points under the current market
rate. There is also a capped limit as to how high the interest
rates can reach. For example, if you have a five percent teaser
rate and a six-point cap, well then your interest rates can
never go above 11 percent.
Plus, the amount by which the interest can fluctuate per
year is also curtailed to a variance of only a few, one or
two, points. As the intervals during which rates shift varies
from plan to plan, it is important that you learn the timeframe
and sequences for your particular loan.
At the extreme end of the spectrum, you may want to consider
what would happen if your ARM rates reached their ultimate
levels. Would you be in a position to meet the payments?
Though the aforementioned types of loans are the two major
forms, there are a variety of deviations:
Cost of Funds Index (COFI)
A subset of the ARM plan is the Cost of Funds Index (COFI)
loan. The difference between this type of loan and a traditional
ARM is that is does not have any caps and automatically adjusts
on a monthly basis. Plus, as it is connected to one of the
stable indexes, the one used by banks when paying their depositors,
it often has quite a slow progressive movement. The advantages
of the COFI include: ability for one to vary their payments
at their own discretion, meaning smaller or larger installments
depending on one’s present circumstances.
Hybrid Loan
As the word hybrid implies, this form of loan is a combination
of many other types in an effort to present the borrower with
a range of options. The majority of hybrids are unwavering
for one of five periods, one-three-five-seven or ten years.
After that initial period, the plan then transforms into an
ARM. Hence, for a fixed time period, one gets a modicum of
stability until he | she is then left to contend with the
rates at which interest rates have either risen or fallen.
On the positive front, you may come into low rates or on the
negative, you may not get so lucky and finding yourself having
to pay more on account of increased interest rates.
Two-Step Loans
Another convergence of multiple elements, the two-step loan
combines the consistency of a fixed loan with the decreased
rates inherent undre an ARM plan..
Consumers most often see these forms of mortgages expressed
as fractional amounts, i.e. 5/25 or 7/23 loans. If one totals
the numbers per equation, he | she will find they each tally
30. This number then refers to the length of the loan, i.e.
a 30-year-period. The numerator (top number) indicates the
number of years for which the loan is fixed while the denominator
(bottom number) refers to either the ARM years or fixed rate
period to follow.
Balloon Loans
Most often balloon loans are short-term loans. Though under
these plans, one typically tends to borrow money for such
brief periods as three, five or seven years, the funds are
still amortized as though it were a plan of longer duration.
Hence, upon conclusion of the shorter loan term, one must
pay back the bank | lender all dollars remaining under the
principal of the loan. Furthermore, this amount must be paid
in one lump (balloon) payment. On the positive front, these
types of loans tend to have lower associated interest rates
than a traditional 30-year plan. Those who only plan to stay
in their home for several years, may want to consider this
option.
As the homeowner need not pay out quite so much in terms
of interest, over the course of the short period, he | she
winds up saving money that otherwise would have simply been
applied to interest payments as opposed to the principal.
As a quick refresher, some of the advantages of the aforementioned
mortgage types include: Pros and Cons
Fixed-Rate Mortgage
Advantage: You know in advance what the payment amounts will
be for the next 10, 15 or 30 years.
Disadvantage: For the stability that accompanies this type
of plan, one will be required to pay a premium cost. Typically,
fixed-rate mortgages are more expensive than ARMs.
Note: Experts suggest this type of plan to those concerned
about the economy and job security.
Adjustable-Rate Mortgage
Advantage: With lower associated mortgage interest rates,
one can have more success in when applying to borrow larger
sums of money. Note: This is a positive feature for those
seeking to purchase a home for the first time, as their credit
limits may not reach as far as they would like it to reach.
Disadvantage: The major downside to the ARM is that if interest
rates should rapidly ascend, then one will be placed in a
position to pay a great deal more than he | she had become
accustomed.
Note: Experts often recommend homebuyers get an ARM when they
do not plan to live in their home for more than five years.
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