Mortgage Loans Explained

With the many different types of mortgage lending out there, it can be a difficult task to choose the best one for your needs. The following points will help you understand the pros and cons of the various types of mortgage loans that you have available.Learn more about this at Island Coast Mortgage.

What are the most common types of mortgage loans?

There are two major types of mortgage loans fixed and flexible mortgage rates.

A fixed-rate mortgage comes with an interest rate that will never adjust over the loan’s 15, 20, or 30 years.

Conversely, an adjustable-rate mortgage’s interest rate would change. Typically, the rates are linked to an index of interest the LIBOR rate (London Inter-Bank Bid Rate) is a common one-and the payments will go up and down if the index changes.

What should I keep in mind if I get a fixed-rate mortgage loan?

Fixed-rate mortgages mainly provide security. You know exactly what interest rate you’re going to pay. If you think your income will not improve much in the years to come, or if you plan to stay in your house for a long time, then a fixed mortgage loan is a good option for you.

Stability comes at a price, on the flipside. Ultimately, you’ll pay higher interest rates than in an adjustable mortgage loan and you’ll need to put a higher down payment (between 10-20 percent of the loan somewhere) into the loan. If you don’t have enough money to pay a big down payment, you’ll have to get Private Mortgage Insurance (PMI) which will raise your monthly payment.

When having an adjustable mortgage loan, what should I consider?

At first, an adjustable mortgage loan offers you a lower interest rate than a fixed one. Most loans offer you three to five years in which you pay a low fixed rate of interest, and then the rate begins fluctuating with the economy. Most loans also put caps on how much the rate will adjust year after year to protect you from volatility in the market. The downside with this type of loan is that interest rates may go up, but then interest may go down again and the payments will go down with it.

If you’re not planning on long haul at your house or you’re planning to sell, then this loan is a better option for you.

How do I compare different hypothetical loans?

By regulation, mortgage brokers are required to give you an Annual Percentage Rate (APR). That formula combines all of your costs (property taxes, insurance, mortgage fees, interest payments, etc.) and presents them as a percentage of your loan. Of example, a loan may have an interest rate of one percent, but you’ll actually pay 1.5 percent when you add all of the extra expenses. The APR is the best way to compare mortgage loans and determine which one is the best deal to give you.