Mortgage Loans: 5 Things You Need to Know

[Nov 23, 2009.]

 

Shopping for mortgages can seem complicated, especially considering the amount of paperwork required for getting a home loan. Here are five critical things to know:

• Mortgage type: Do you have or want a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM)? Principle and interest payments remain the same throughout the life of an FRM. ARMs offer the advantages of lower start rates, and if interest rates drop, you can get a better rate without incurring the expense of refinancing. Conversely, if rates increase, your mortgage rate and payment do as well. Mortgages referred to as hybrid ARMs combine the features of FRMs and ARMs. A 5/1 ARM, for example, offers the security of a fixed rate for five years before converting to a one-year ARM.
• Interest rate: Sometimes called the mortgage rate, this is the interest you pay on a mortgage balance. If you have an FRM, your interest rate doesn't change. With an ARM, your rate can change according to the provisions in in your loan documents.Mortgage documents should include a schedule of when rates can adjust, and how adjustments are determined. ARM adjustments are determined by a specific financial index. Selecting an ARM with caps, or limits, provides some protection against excessive adjustments.
• Annual percentage rate (APR): Don't confuse mortgage rates with APR. When comparing mortgage quotes, check the APR, which includes all costs of a home loan. If you're comparing two mortgage loans with identical rates, features, and terms, check the APR. The higher APR mortgage would cost more. For loans with similar APRs, choose the one with the lowest upfront costs.
• Features: These are the conditions affecting how your mortgage loan performs. For example, if your mortgage allows for interest-only payments, your mortgage balance will not decrease during the time you make interest-only payments, but your monthly payment will be lower during the first years of your mortgage. The terms of these features are disclosed on forms called riders. It is important that you understand the riders well, because they describe the "customized" terms of your mortgage. individual features can impact your payments, mortgage balance, and mortgage rates
• Repayment term: Most home loans are repaid over 30 years, but you can also select a 15 year term, and you may also find longer terms. The shorter your mortgage term, the more you save on interest. Use a mortgage calculator to estimate potential savings between a 30 year and 15 year mortgage with identical features. If you can afford a higher mortgage payment, selecting a shorter mortgage term typically provides a lower mortgage rate.

Review mortgage quotes carefully, and ask as many questions as needed for understanding each mortgage quote you receive.

 

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.