When buying a home, few individuals have enough money upfront to purchase the home. As a result, the majority of homeowners use a special loan called a mortgage to purchase their home. Mortgages are long-term loans, usually between 15 and 30 years long, which include the principal and an interest rate.
The principal of a mortgage is the term used to describe the total amount of the mortgage. For example, if you used a mortgage to purchase a $150,000 home with no down payment, the principal of the mortgage would be $150,000.
The interest rate of a mortgage is the way the bank or other loan holder makes their money. When you take the time to consider how much interest you pay on a home, it can sometimes cover the cost of the home several times, but this is the cost of not having enough money to buy the home upfront without a loan.
Depending on the type of mortgage, the interest rate is either fixed or adjustable. In a fixed rate mortgage, the interest rate remains the same for the entire length of the loan.
In an adjustable rate mortgage, the interest rate is adjusted, using the current interest rates as a metric, periodically over the course of a loan. Most adjustable rate mortgages have an interest rate that is adjusted once every 2 or 3 years, although this can vary, with some being adjusted every year and others only being adjusted once every 5 years.
Typically, an adjustable rate mortgage offers a lower initial interest rate and if the market is not preforming well, it is even possible for the interest rate to be lowered when it is adjusted, although this is not something you would want to bank on. Instead, it is a good idea to plan for the interest rate of an adjustable rate mortgage(ARM) to increase each time it is adjusted.
One very important part for prospective homeowners to consider when evaluating an ARM is how frequently the interest rate is adjusted, how much the interest rate can be adjusted each period, and how much the interest rate can be adjusted over the entire course of the mortgage.
Fixed Rate Mortgages, on the other hand, usually have a slightly higher interest rate, but offer the advantage of remaining the same for the entire length of the mortgage.
When evaluating options and trying to find the best deal on a mortgage, it is important to view an amortization table for the mortgage. An Amortization Table breaks down each payment for the entire length of the mortgage, showing how much the payment is and how much of the payment is going towards interest.
Over the course of the mortgage, the first several years go towards paying the interest of the mortgage. So, for several years, the overwhelming majority of each months payment is going towards interest. After about 5 to 10 years, this reverses and more of each payment is going towards the principal of the mortgage. By looking at an amortization table, you can tell when this switch will occur.
Using an online Amortization Table Generator, which most banks offer on their websites, can be an excellent tool not just for understanding the loan itself, but also for seeing how things like extra payments can affect the amount of interest you pay over the course of the loan.
The mortgage is a popular lending tool used by people who would like to buy a home, but do not have enough money to purchase the home outright. It is actually a very old type of loan, which has been used for thousands of years. For the purposes of this article, however, we will be discussing modern mortgages and specifically the Adjustable Rate Mortgage.
Traditionally, the 30 year fixed rate mortgage has been the standard type of mortgage, with Adjustable Rate Mortgages, or ARMS, actually being rather new. An adjustable rate mortgage differs from other mortgages in that the interest rate of the loan varies, or is adjusted, multiple times throughout the length of the loan. So, rather than having a fixed interest rate the entire length of the loan, with an ARM, the interest rate will be adjusted every few years.
How frequently the interest rate is adjusted varies, but it is usually adjusted 2, 3 or 5. Some subprime ARMs adjust more frequently, but usually the rate is not adjusted more than once every 2 years. When it comes time to adjust the rate, the bank will look at the current market values and use this to either raise or lower your interest rate.
A standard ARM will have a set limit of how much the interest rate can be raised each adjustment, as well as how high the interest rate can be raised in total over the length of the loan. Most Adjustable Rate Mortgages can only be adjusted by 1% each time, although this can vary.
When planning for an Adjustable Rate Mortgage, it is a good idea to assume that the interest rate will be raised each time by the full amount, although this is not always the case. For example, during the current housing market crash, most people with ARMS should have seen their interest rate lower, but this is not the norm.
One of the main advantages of using an Adjustable Rate Mortgage is that the initial interest rate is usually lower than that of a fixed rate mortgage. For instance, it is not uncommon for an ARM interest rate to be 1% lower than the comparable fixed rate mortgage offered by the lender. This means that for the first two periods of adjustment, an ARM should cost less than a standard fixed rate mortgage. Of course, after three adjustment periods, the interest rate is usually higher than that of a fixed rate mortgage.
This low initial rate is one reason that ARMs are so popular, because it gives the homeowner some breathing room to get more equity into the home or otherwise save money. The downside to this is that eventually the rate will rise, so if you haven’t paid the house down any by this point, it can become more expensive.
The Adjustable Rate Mortgage also had a role in the current housing market situation, with a number of subprime ARMs being offered. These subprime mortgages often had much shorter adjustment periods, no limit on how high the rate could climb, and would raise more than 1% at a time. As a result, these loans quickly became unfordable. Another problem was that many included terms that resulted in a drastically increased interest rate after only one missed payment.
Mortgages are actually a quite old type of lending device, with records showing that the use of a mortgage actually dates back several thousands of years. However, traditionally, the land owner did not have many rights and were not well protected.
One of the biggest differences with older mortgages and newer ones is that during the middle ages, the person holding the mortgage, which was usually a king or land baron, actually owned the land and could do pretty much whatever they wanted with it. Until the person had actually paid off the mortgage, they had, for all intensive purposes, no rights.
This went on for some time, but during the twentieth century, the government began to pass a number of laws, such as the Truth in Lending Act and Fair Credit Reporting Act, which were designed to protect the rights of the homeowner, instead of the lender.
Today, mortgages remain a very popular tool and are often a necessity when it comes to purchasing a home, as most people do not have the money saved up to buy a home.
When purchasing a home, it is important to save up some money for a down payment. For much of the twentieth century, a 20% down-payment had been the standard, with pretty much no banks or mortgage lenders offering a home without at least 20%. Recently, however, lenders have relaxed this requirement and, in fact, leading up to the current financial crisis, lenders had begun to take no down payment at all.
While the no money down mortgage had become very popular, as credit continues to tighten up, most lenders have moved away from this and to a more traditional down payment structure. However, it is still possible to get homes for 10% down and there are still probably some lenders who might even offer no money down loans, but paying a down payment is in the best interests of the homeowner.
The advantage of having a down payment are several fold. For one, it lowers the total price of the home, so the principal of the loan amount is greatly reduced. As a result, a great deal less interest is paid over the course of the loan and the monthly payment is also much lower.
For example, take a home that is $100,000 and financed with a fixed rate mortgage of 4.5% over 30 years. Without a downpayment, the average monthly payment will be $506.69 and over the course of 30 years, $82,406 will be paid as interest. If, on the other hand, you paid a 10% down payment of $10,000, the average monthly payment will be $456.02 and the total interest paid will be 74,166.
As you can see from the above example, by paying even just a 10% down payment, you significantly lower the amount of interest paid on the mortgage, as well as the monthly payment.
Another big benefit of paying a down payment is that you are building equity in your home. Equity is the difference in what the home is worth and how much you owe on the mortgage. Overtime, as you pay off the loan, you build equity, which can be turned into cash when you sell the home or used to borrow against. By paying a down payment, you are instantly putting equity into your home.
About the only person that benefits from a non-money-down mortgage is the lender. In the end, they end up making much more in interest over the course of the home loan.
Often, one of the most difficult parts of buying a home is finding the best lender. There are many to choose from and while in most cases they are honest and trustworthy, there are a number of disreputable lenders as well.
One of the most important parts of selecting a lender is making sure to explore all of your options, rather than simply going with the first lender you speak with. Your bank is a great place to start, because they will usually be able to give you an answer very quickly and in most cases will have a rate that is fairly standard. This provides a great basis for comparison when comparing other mortgage offers.
It is also a good idea to speak with a few mortgage brokers and other lenders. However, often these types of lenders get a commission for steering you towards a specific loan package, so they do not always have your best interests at heart. This is why it is so important to explore all options and compare prospective loan offers.
Usually, your real estate agent will also have a connection or two with mortgage lenders or mortgage brokers, so they might tell you to check them out. It will not hurt anything to hear their offer, as they often do have good rates, but keep in mind your real estate agent gets a commission if you go through this lender, so they are somewhat biased.
Often, making the recommendation is required by the agency they work for, but if they aggressively push it, this is usually a warning sign of a direct conflict of interest. In this situation, such a direct violation of ethics is a good indication that their other advice should be taken with a grain of salt.
Every so often, you will come across a seller that wants you to go through their broker or lender, but, unlike your real estate agent offering you advice, any seller giving you this advice should instantly raise warning flags. It could be a real estate owned property or perhaps a private owner, but whatever the case, the seller obviously has some sort of association with the lender, so this should instantly set your warning bells ringing.
You are under NO obligation to use the lender of the seller and for them to even suggest it, especially if they include it in writing, is a bad sign. In the best case scenario, they get a cut from the sale and simply have poor ethics, but in the worst case, it could be they are in cahoots with the lender to commit some sort of fraud.
In almost all cases, it is important to get several offers and compare them, so that you get the best deals. This way, you know you are getting a good deal and are able to look at an offer and determine if it is at or below market value.
However, make sure that you are not paying any fees for these estimates. The lender should be able to take your information and make an offer, without having to do any checking. This is often called a preapproval letter or a prequalification letter, which basically means that assuming what you told the lender is true, they will be willing to offer you a given rate for your mortgage. This is one of the reasons that being honest is so important, because in the end they will find out if you lie about your credit or revenue.
When it actually comes to time to apply for the loan, most lenders require an application fee, but just to get an estimate, there should be no cost.
In life, often buying a home is the biggest monetary investment a person will ever make. In most cases, especially in the United States, the homeowner does not have the money to purchase a home upfront, so uses a special type of loan called a mortgage. There are many types of mortgages, but, today, the Adjustable Rate Mortgage and the Fixed Rate Mortgage are the two most common kinds.
Mortgages are actually nothing new and date back many hundreds of years. However, over time, the rights of the homeowner has been increased and made stronger. In the times of Kings, the person who held the mortgage was, for all intensive purposes, the homeowner and had full control over the property until the mortgage was repaid. However, today, the bank is not considered the homeowner and can only take possession of the home if the loan holder does not pay, with even this not being a process without some judicial oversight.
Another change that has occurred recently is the types of mortgages used. The Fixed Rate Mortgage was, traditionally the primary type of home mortgage for many years, but today there are a number of other loan devices, of which the Adjustable Rate Mortgage is becoming more and more popular.
Fixed Rate Mortgages are much easier to understand than other types of loans. The loan holder has a fixed time that they must repay the loan by, usually 15 years or 30 years, and a fixed interest rate for this entire time. So, if you get a 30 year fixed rate mortgage at 6.5%, you will know that each mortgage payment for the next thirty years will be at the same rate.
Fixed Rate Mortgages offer a number of advantages, mainly that your interest rate can not usually be raised, well at least providing you make the payments. This makes it very easy to plan payments, while also protecting your investment against inflation and higher interest rates.
The Adjustable Rate Mortgage(ARM) is much new by comparison to fixed rate mortgages, first becoming popular in the early nineties. Adjustable Rate Mortgages are mortgages that have an interest rate that is adjusted every few years. The period of when the interest rate increases varies, but it is often every two or three years.
When an adjustable rate mortgage reaches its adjustment rate, the loan holder will change the interest rate to reflect the current market. Most ARMs are restricted to only raise one point(1%) each adjustment, but this is not always the case. It is possible for the interest rate to go down, such has been the case for many recently, but this is not something that should be counted on.
It is also possible that the interest rate will not raise the entire 1%, or whatever the limit is, but again this should not be counted on. In addition to having a limit of how much the interest rate can change with each adjustment, there is also usually a limit on how high the interest rate can raise over the course of the entire loan. For instance, there might be a 8% adjustment allowed over the entire course of the mortgage.
Since understanding how and ARM works can be a little difficult, it is often easier to look at an example adjustable rate mortgage and see how it works.
Take a 2 Year ARM that starts with an interest rate of 4.75%, which can be adjusted by 1% each period.
For the first two years of the mortgage, the interest rate will be at 4.75%. Then, after two years, the interest rate will be reevaluated and the current market will be taken into account. It will then be raised or lowered, keeping within the 1% limit, so for this example, lets assume it raises by the entire amount.
For the next two years, the interest rate will be 5.75%, which will again be reevaluated in 2 years.
There are a couple of advantages to using an ARM, but it is not always the best choice. The main advantage is that the introductory interest rate is usually lower than that of a fixed interest rate. So, the first few years will be lower, allowing the homeowner to put some extra money towards the principal of the loan or simply saving some money. Many people go with an ARM with the intention of paying their home down more rapidly or refinancing when the rates equal that of a standard fixed rate mortgage.
The ARM, and several variants, were one of the most abused loans during the recent real estate bubble bust, which resulted in many foreclosures.
There were a number of details that make an ARM subprime. One of the main factors was there was often no limit on how much the rate could increase, especially if the person missed a payment, which often forfeited many of their rights.
This lack of a ceiling on increases, especially when the homeowner had missed a payment, caused these subprime ARMs to rapidly increase. It was also not uncommon for people to get sucked into negative amortization ARMs, which basically mean the person was not paying all the interest on their loan, which was being tacked onto the end of the mortgage. As a result, each month the person would end up owing more on their loan.
For someone with less than perfect credit, it is often not possible to get a good rate on a Fixed Rate Mortgage, so an Adjustable Rate Mortgage might be the only option. ARMs also sometimes offer such a low initial interest rate that the there are literally hundreds of dollars in differences for the first few years. However, an Adjustable Rate Mortgage is not always the best choice.
It is important to always find out how much an ARM can increase each period and how much it can increase over the course of a loan. ARMs that have no limits, or with unrealistic limits, are most likely subprime, so this is an important consideration.
For many people, buying a home is the single largest investment of their life. It can be a wonderful experience and rewarding on many levels, aside from just monetary ones. Since most people do not have enough money saved up to buy a home, it is usually necessary to apply for a mortgage, which is a special type of loan that covers the entire cost of the home.
There are many types of mortgages, but most are for 15 or 30 years, with a payment made each month towards the total amount of the loan. Each loan has an interest rate, with this being the percent of the loan that is being paid to the bank or loan holder. Fixed rate mortgages have an interest rate that remains the same over the entire length of the mortgage.
Variable Rate Mortgages or Adjustable Rate Mortgages(ARM) are a rather new loan device, which offers a lower initial interest rate, which is adjusted every few years. In theory, the interest rate could go up or down each time it is adjusted, but it is a good idea to plan on it always going up. Over the course of the ARM, there should be a set number that represents how high the interest rate can go up.
Many of those with subprime mortgages ended up getting ARMs that did not have a limit on how high they could go and were set to adjust every year, as opposed to every two or three years. As a result, these loans quickly became unaffordable. So, for those who interested in taking advantage of the low initial rate of an ARM, it is a good idea to do a great deal of research and make sure it would not be classified as subprime.
Before a lender can tell you whether or not they will actually offer you a mortgage, it is necessary to complete a mortgage application. This consists of information about your bank, job, and personal history.
Many lenders will provide what is often called a pre-approval letter or a pre-verification letter, but these are usually not taken as seriously as actually being approved for a loan. This is because the loan company does not actually process the application at this point, but instead provides a estimate of what they could offer, providing the information provided is correct.
It is very important to be as honest as possible with your lender at all points, because lying won’t get you anywhere. Eventually, the loan company will run your credit and check your references, so while a lie might get a nice looking pre-approval letter, when it comes time to actually apply for the mortgage, the lie will become apparent.
It is also important to have an idea of what the going interest rates and mortgage terms are. This way, you will be able to compare prospective loan offers with the standard rate and determine whether it is a good deal or not. This is one reason that it is often a good idea to start with your bank. They will usually have a semi-competitive rate that is fairly indicative of the normal mortgage rates. Your bank can also often work quicker than other loan officers and might not even charge anything to check your approval.