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5 questions about your next mortgage loan

[Apr 9, 2010.]


While it's easy to focus on finding the lowest mortgage rates, there's more to shopping for your next home loan than only comparing rates. Here are some things to know about mortgage loans you're considering:

Is this mortgage loan fully amortized? A fully amortized mortgage is paid off with a uniform payment amount over a specified amount of time. You can also find mortgage loans that aren't fully amortized; these include interest-only mortgages, and negative-amortization mortgages that start out with very low payments but later add deferred interest to the loan amount. Before accepting a mortgage loan with an initial period of low payments, make sure you understand how payments and the loan amount can be affected over the entire repayment term.

What is the interest rate? Is the interest rate fixed or adjustable? If you could benefit from lower payments for the first few years, selecting an adjustable-rate mortgage (ARM) loan can be a good choice. If you're considering ARM loans, you'll want to know how and when your interest rate can change, and ensure that there are interest rate caps that protect you from large rate increases.

Why is a shorter repayment term preferable to a 30-year mortgage loan? If you can comfortably afford a 15- or 20-year repayment term as opposed to a typical 30-year term, you can save thousands of dollars in interest over the term of your mortgage. Estimate potential savings by using a mortgage calculator for comparing identical mortgage amounts and rates, but enter one as a 30-year term and the other as a 15-year term.

Does this loan carry a prepayment penalty? It's always good to have the option of paying off your mortgage before its term expires. A prepayment penalty may interfere with your plans to pay off your mortgage early. Some mortgage loans have a prepayment penalty in effect for a specific part of the mortgage term; this is usually intended to discourage refinancing before an ARM loan adjusts to a higher rate from its initial low introductory rate.

Can this mortgage loan be assumed? Unless you're taking out a VA or FHA mortgage loan, the answer is probably no, but having an assumable mortgage that carries a low interest rate when mortgage rates are rising is a great advantage when selling your home.

You'll also want to compare mortgage quotes; closing costs and lender fees can vary considerably. Checking the annual percentage rate (APR) for each mortgage quote provides a more accurate estimate of all loan costs rather than concentrating on mortgage rates alone.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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