Everything You Wanted To Know About Mortgages
But Where Afraid To Ask
Most contracts for purchase
of real estate are contingent on the buyer's ability to secure
a mortgage. Knowing how much money you can afford to borrow and
what it means to borrow money on a long-term basis are important
considerations.
Obtaining an affordable mortgage depends not only
on what you feel you can afford but, more importantly, on what a lending
institution says you can afford. Before lenders will issue a commitment
to lend large sums of money, they must be assured that the buyer can
afford to repay the loan and that the value of the property is
sufficient collateral to guarantee repayment of the loan in case
the borrower defaults.
Since financing is such a critical aspect
of making an offer to purchase property, it is crucial to consult with
a lender prior to beginning your search for the "right property." Pre-qualification
from a mortgage lender is a valuable tool to use in the home buying
process. Give us a call, and we'll be happy to talk with you about
your needs.
TYPES
Numerous types
of mortgages are available to the borrower today. They
break down into two basic categories--fixed rate and adjustable
rate. Fixed rate mortgages have been around the longest,
and generally people have more experience with this type
of mortgage. Very simply stated, the interest rate is fixed
for the term of the loan.
The second type is the adjustable rate mortgage (ARM).
Since their introduction in response to the unprecedented
high interest rates of the early 80's, ARM loans have developed
into the most diverse group of mortgages ever created.
Our goal is to give you a very basic understanding of some
of the major components of an ARM. For a detailed discussion
of the program that will best meet your needs, please give
us a call.
Typically, ARM loans are named according to their adjustment
interval. For example: A 3/1 ARM is fixed for the first
three years and then becomes a one-year ARM for the remainder
of the 30-year term. A 3/3 ARM adjusts every three years
throughout the entire 30-year term. ARMs with an initial
fixed period are very popular because they have a lower
initial interest rate than a 30-year fixed. This stability,
coupled with the realization that the homeowner may not
have the mortgage for longer than the short fixed period,
has added to their popularity.
When considering which type of ARM to get, you need to
be aware of several factors that affect this type of mortgage.
INDEX
The financial instrument used as the foundation for determining future
rates as adjustments are made. There are several indexes that are used
in the mortgage industry--T-Bill, LIBOR, Prime, and Cost of Funds.
MARGIN
The amount the lender adds to the index to arrive at the adjusted rate
so as to provide a satisfactory yield for their investment.
Margins vary and can be a key factor in selecting the right
loan for you.
CAPS
ARMs have limits as to the amount they are allowed to adjust at each
interval. This is called a cap. Caps can be applied to the interest rate
or the payment; this varies with the type of loan you choose.
WRAP-UP
As you can see there are many variables to consider when choosing a
loan product. With the rates increasing, there are new products coming
on the market daily; and the guidance of a mortgage professional is a
must.
Home buyers should begin their quest for a new home with a pre-approval from
their lender. Too often the financing is left out of the equation until long
after the home is selected. This can lead to a myriad of avoidable problems.