Your mortgage is one of the largest investments you make. Choosing the right loan is important and will help you avoid making a 15 or 30 year mistake. Before applying for a mortgage it is important to familiarize yourself with basic mortgage terminology; here are the basic types of mortgage loans to help you get started on the right foot.
When your parents applied for a mortgage there was typically only one option available to them: a traditional 30 year mortgage with a fixed interest rate. Today there are dozens of choices and options for your loan, ranging from fixed to adjustable interest rates, jumbo mortgages, and option loans. Here are the basics you need to know.
Fixed Interest Rate Mortgage Loans
The most popular variety of mortgage is the traditional loan with a fixed interest rate. Fixed means the interest rate and monthly payment do not change over time. Homebuyers who want predictable payment amounts with little or no risk will find a 30 year fixed rate mortgage to be their best option.
Adjustable Interest Rate Mortgage Loans
Adjustable rate mortgage loans come with lower interest rates than a comparable fixed rate mortgage, at least initially. Adjustable rate mortgages typically come with an introductory interest rate that will change at the end of the introductory period. This type of mortgage is “adjustable” because the mortgage lender will change your interest rate and payment amount at regular intervals specified in your loan contract. The interest rate is tied to a financial index and will rise and fall based on changes in the index when the lender adjusts your mortgage, often every year on your loan’s anniversary date. You should only consider an adjustable rate mortgage if you can handle changing interest rates and payment amounts.
Jumbo Mortgages
There is a limit that traditional mortgage lenders well lend. This amount is called the conforming mortgage limit and is set by the institutions in the United States that regulate the mortgage industry, known as Freddie Mac and Fannie Mae. In 2006 this limit is $417,000. If the home you are purchasing is over this limit you may be required to seek your mortgage from a specialty mortgage lender. These specialty mortgages are called “Jumbo” mortgages. Jumbo mortgages come with higher interest rates and fees than traditional mortgage loans so it pays to shop around from a variety of Jumbo lenders.
Balloon Mortgages
Balloon mortgages are a special type of loan intended to provide short term financing only. The term length of a balloon loan is very short, often only five to seven years. At the end of the term the entire loan balance is due. This large payment is referred to as a “balloon” payment. This type of mortgage is useful for real estate investors and homeowners in certain situations; however, it is often abused by predatory mortgage lenders. Unless you know exactly what you are getting yourself into you should avoid this type of mortgage.
You can learn more about your mortgage options, terminology, and common mistakes to avoid by registering for a free mortgage guidebook.
To get your free mortgage guidebook visit RefiAdvisor.com using the link below.
Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
Claim your free guidebook today at: http://www.refiadvisor.com
Mortgage Loan Terminology
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