Mortgage Loans Explained In Plain English

With various types of mortgage loans out there to choose the right one for your needs can be a difficult task. The following steps will help you understand the pros and cons of different types of mortgages available. What are the main types of mortgage loans? There are two main types of mortgages, 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 on adjustable rate mortgage will change. The rates are usually linked to an index interest rate, the Libor (London Inter-Bank Offer Rate) is a popular and your payments go up and down, if the variation of the indices. If I get a fixed rate mortgage, what should I remember? Fixed rate mortgages offer stability above all. We know exactly what interest rate you will pay. If you think your income will not change much over the years to come, or if you plan to stay indoors for a long time, then a fixed mortgage loan is a good option for you. The flip side, stability comes at a price. Initially, you pay interest rates higher than in an adjustable rate mortgage loan and need to put a higher down payment (somewhere between 10 to 20 percent of the loan) the loan. If you do not 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 a mortgage loan adjustable rate? An adjustable rate mortgage offers an initial interest rate lower 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 the rate may vary from year to year to protect you from market fluctuations. The risk of this type of loan is that interest rates might rise, but then again, interests can also go down and your payments go down with them. If you are not going to be at home for the long haul or are you going to sell, then this loan is the best option for you. How do I compare different mortgage loans? mortgage brokers are required by law to provide an annual percentage rate (APR). This figure adds up all costs (property taxes, insurance, cost of credit, interest payments, etc.) and expresses them as a percentage of your loan. For example, a loan may have a rate of one per cent interest, but when you add all the extra expenses, costs to be paid 1.5 percent. The APR is the best way to compare mortgages and determine which offers the best terms. As mortgage brokers decide whether I can get a mortgage? Mortgage brokers are looking for indicators that tell them that you can pay the loan back. Among the things you look at is your credit history and if you have had stable employment for the last two years. It's usually a good idea to request a copy of your credit history before going to your mortgage brokers. Mortgage brokers use a formula called 28/36 to decide whether you can afford to pay the mortgage loan. This means that your mortgage payment may not exceed 28 per cent of its income and the total credit payments (for credit cards or other loans, including mortgage) can not exceed 36 percent. Joel Meadowridge is the editor for the National Mortgage Broker Directory where you can find more information about mortgages and a directory of mortgage brokers located in major cities across the United States.