Mortgages 101

Mortgages 101
There are various terms you should know if you are in the market for home financing. When comparing mortgage products you must know what fees and points you will be charged as these will increase the mortgage or closing costs. Additionally, don't be fooled by introductory teaser-rates or pre-payment penalties.

Traditionally, prime lenders finance homes at 80 percent loan to value. Simply put, this means the borrower pays 20 percent of the value of the home in cash. Prime lenders offer an alternative: if you can not put 20 percent down, you pay for private mortgage insurance or PMI. This provides the lender with insurance in the event the borrower defaults. Prime mortgages generally serve individuals who have good credit and are qualified to make the monthly payments.

Be very careful when you are searching for a mortgage. Whether you have good or not-so-good credit, you must compare and research the products. If your credit is not perfect, research the alternatives, such as an FHA mortgage loan, with a qualified mortgage professional. Get a good faith estimate from the professional. This will outline all costs (line-by-line), which will allow you to compare apples-to-apples before you decide on what loan product to use.

Fixed Rate or ARM?

Generally, a fixed rate mortgage will remain at the same interest rate for 15,20,30, or 40-years. This means your principal and interest payment will remain the same for the life of the loan. Taxes and insurance may be escrowed by your bank and these payments can change year-to-year, but will not impact your principal and interest payment. The shorter the term, the higher the payment will be. But, the longer the term of the loan, the more interest you will pay over the life of the loan.

An Adjustable Rate Mortgage or ARM changes based on the terms of your loan. The cost of your loan (interest rate) could adjust each year, every three years or every five years. Generally, this translates into payments that go up or down at those intervals. When shopping for an ARM, ask about three things: the index, the margin and the adjustment period. Do not forget to get the good faith estimate and compare products each lender is offering.

Introductory Teaser Rates
Introductory Teaser Rates are low up-front interest rates to entice borrowers. Teaser rates are common with ARM mortgage loans. For instance, the borrower may pay 1 percent interest on the principal for the first three months, but after the three-month period the rate reverts to the market rate specified at closing. This will cause your mortgage payment to jump and sometimes skyrocket. Be sure you understand all the terms of your mortgage before signing.

Prepayment Penalties
Some loans may charge prepayment penalties. The lending institution may require you pay penalties if you pay back the loan within a given period of time, say the first three to five years. Some charge the penalty if the borrower tries to refinance into a different type of mortgage. Others will even charge a prepayment penalty if you sell the house and pay off the mortgage. Avoid loans with prepayment penalties because the costs can devastate your bottom line.

Now you know the basic terms of mortgages. Mortgages are not difficult to understand, but the legal terms and forms are quite daunting. If you know the right questions to ask, you will not feel intimidated by the mortgage professional. Knowledge is power, so keep learning!

For the lowest mortgage rates, see Mortgage Rates

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