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.