Basically mortgages can be divided into to types: those with fixed interest rates and those with mortgages whose interest rates change on a periodic schedule. In this short article I will present some of the pros and cons of fixed interest are mortgages and their types.
The most traditional, and probably the best known, is the 30-year fixed rate mortgage. It was very popular in the past as it offered relatively low monthly payments throughout the loan term. But as the therm of loan is quite long the interest you will pay is respectively high. So it might be a good idea to consider another type of fixed interest rate mortgage: 15-year loan. Although the installments will be higher the overall interest you will pay should be much, much lower.
But the best idea might turn out to be taking a biweekly mortgage. In this type of loan you end up paying 26 biweekly payments a year thanks to which you save a lot of time and finish returning the money a lot quicker. Such a type of mortgage has one additional advantage: the principal upon which the interest is calculated decreases every fourteen days so in fact you save money.
At present the majority of banks does not make too big a fuss when you want to take a big loan, or even a mortgage so you might get surprised how fast you will get one. Therefore, it is easy to forget that the banks’ primary concern is not necessarily your welfare, but making profits and so in the euphoria connected with the great news that a bank will give you a loan with pleasure you might forget to ask a few important questions. Silly though it might sound there are many people who have made a similar mistake and took a loan in the first bank that agreed to lend the money. That is one of at least several mistakes that many people make and then suffer its consequences for a few years. So in order to give you a hint at what mistakes you can easily avoid when taking out a mortgage I decided to make this short compilation:
1. First and foremost, as I have mentioned in the introduction above, you should not get too excited when the first bank you enter offers you a seemingly attractive mortgage. Remember that mortgage brokers and lenders often have very good interpersonal skills and it might not be too difficult for them to seem very convincing when it comes to giving loans, in the end that’s whet they do for living. Thus, you ought to remember to compare offers of a few banks as it may turn out that another bank has a more interesting offer.
2. Secondly, you need to make sure you understand the entire text of the contract. Banks are not renowned for using plain and simple language. In fact, in the majority of situations the specific banking jargon in used precisely to confound us. It is not disgraceful to ask for help with a text full of phrases such as: after-tax investment return, loan origination rate, property tax rate, principal payment, or future sales commission and so on and so on. I intend to prepare a small glossary of those on plenty of other terms used by bankers to help you understand what you are dealing with.
3. Check your credit history. One of the first things any bank will do before deciding if you are reliable enough to get a loan is to check your credit history. However, as this is free and you can do it yourself why not check it for any inconsistencies in advance and set everything right. There might be no trouble with your history at all, or perhaps there is a small detail that needs clarifying. If a bank finds something it may take a long time to put everything right, but if you do it and the bank knows nothing about that you might save plenty of time, trouble and stress.
This is often the case and should not be a great concern. You can begin negotiating with the help of your broker. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make some repairs. Negotiations on a price go back and forth several times before you reach a deal.
There are many types of mortgages, and the more you know about mortgages, the better.
Most people go for a fixed-rate mortgage, where interest rate stays at the same level for the term of the mortgage - normally over a 30-year period. The advantage of a fixed-rate mortgage is the borrower always knows exactly how much the mortgage payment will be.
Another kind of mortgage is an Adjustable Rate Mortgage, where interest rate and monthly payments usually start lower than a fixed rate mortgage. The rate and payment can move either up or down. The adjustment is tied to a financial index. The advantage of an adjustable Rate Mortgage is that the buyer may be able to afford a more expensive home.
There are several government mortgage programs such as the Veteran’s Administration’s programs and the Department of Agriculture’s programs.
There are two good times when you can refinance your mortgage. If you have an adjustable rate mortgage, it is good to refinance during the periods of rising interest rates. If you refinance to a fixed rate mortgage, you can avoid the higher costs when the adjustable rates are going up.
Another good time is when you get a lower interest rate. In such a case, you have to make calculations and see if your monthly savings will pay back your refinancing costs.
If you have cash flow difficulties, you may want to lower your mortgage payments by extending the term of the loan. This might not be a good reason to refinance, unless you get a lower interest rate on the new loan as part of the bargain. If you extend the term of your mortgage without changing anything else, you might resolve your cash flow situation in the short run. In fact, your total interest paid on the mortgage will be higher.