Mortgage Loans Explained In Plain English
What are the main types of mortgage loans?
There are two main types of mortgage loans—fixed-rate and adjustable-rate mortgages.
A fixed-rate mortgage comes with an interest rate that will never change over the 15, 20 or 30 years that the loan will last.
In contrast, the interest rate of an adjustable-rate mortgage will change. The rates are usually attached to an interest rate index—the LIBOR rate (London Inter-Bank Offer Rate) is a popular one—and your payments will go up and down if the indexes change.
If I get a fixed-rate mortgage loan, what should I keep in mind?
Fixed-rate mortgages offer stability above all. You know exactly what interest rate you will be paying. If you think that your income is not going to change much over the coming years, or if you are planning to stay in your house for a long time, then a fixed mortgage loan is a good option for you.
On the flipside, stability comes at a price. You will initially pay higher interest rates than in an adjustable-rate mortgage loan and you will need to put a higher down payment (somewhere between 10 to 20 percent of the loan) into the mortgage. If you don’t have enough money to afford a high down payment, you will need to get Private Mortgage Insurance (PMI), which will increase your monthly payments.
What should I consider when getting an adjustable-rate mortgage loan?
An adjustable-rate mortgage loan initially gives you a lower interest rate than a fixed one. Many loans give you three to five years during which you pay a low fixed interest rate, and then the rate begins to fluctuate with the market. Some loans will put caps on how much your rate can change from year to year to protect you from market fluctuations. The risk with this type of loan is that interest rates might go up, but then again, interests can also go down and your payments will go down with them.
If you are not planning to be at your house for the long haul or you are planning to sell, then this loan is a better option for you.
How can I compare different mortgage loans?
Mortgage brokers are required by law to provide you with an Annual Percentage Rate (APR). This figure adds up all your expenses (property taxes, insurance, loan fees, interest payments, etc.) and expresses them as a percentage of your loan. For example, a loan might have a one percent interest rate, but when you add all the extra expenses, you will actually pay 1.5 percent. The APR is the best way to compare mortgage loans and decide which one offers you the best deal.
How will mortgage brokers decide whether I can get a mortgage loan?
Mortgage brokers are looking for indicators that tell them that you can pay the loan back. Among the things they will look at are your credit history and whether you have had stable employment for the last two years. It is usually a good idea to ask for a copy of your credit history before you go to your mortgage broker.
Mortgage brokers use a formula called 28/36 to decide if you can afford your mortgage loan payments. This means that your mortgage payments cannot be higher than 28 percent of your income and your total credit payments (for credit cards or other loans, including your mortgage) cannot be higher than 36 percent.
Joel Meadowridge is the editor for the Mortgage Broker National Directory where you will find more information about mortgage loans and a directory of mortgage brokers located in major cities across the United States.