If you’re buying your first home, chances are you don’t know the first thing about comparing mortgages or what ‘amortization’

mortgage interest rate

means. Buying a house is probably one of the biggest decisions you will ever make and undoubtedly your biggest purchase. Heading into such a decision, it’s important that you know everything there is to know about what this purchase will mean and require of you both now and in the future.

Unless you won the lottery or come from a very wealthy family, you will likely be funding your home purchase with a mortgage. What is a mortgage? Basically, a mortgage is a loan specifically for financing the purchase of a home. When you sign the paper work for your mortgage, you’re agreeing to the terms of a legally binding contract that include your house as collateral for the loan and an agreement that you will repay the debt, with the addition of interest, over the course of a set number of years. In the end, your total mortgage cost is the principal, or the amount of money you needed to borrow to buy the house, plus the fee to the lender for loaning the money, as determined by the current interest rate.

Each month, you will pay a set amount of money towards the debt, which will include interest, private mortgage insurance and taxes. Amortization is the process through which you reduce the size of the debt over the course of a set number of years. In the beginning, then, you will likely pay mostly interest each month and then the principal afterwards.

The way to reduce the amount of money you must borrow, and subsequently your monthly payments, is to make a down payment on the house. You will want to save up as large a down payment as you possibly can, as a lender will view a mortgage candidate with a down payment that’s less than 20% as higher risk, and may use an escrow account for collecting expenses like taxes and insurance, which will be built into the monthly mortgage payment.

When it comes to comparing mortgages, it’s important not only to know how they work, but also what the difference is between fixed and variable-rate mortgages. If you’re buying your first home, you may be tempted by the fixed-rate mortgage because you can expect to pay the same interest rate for a set period of time during the existence of your mortgage. With a rate and, therefore, monthly payments that don’t really change, it’s easier to devise and stick to a monthly budget.

Variable-rate mortgages, on the other hand, have fixed payments but the amount of interest you will pay does fluctuate with changes in the market. While this makes it less easy to budget your monthly mortgage payment, banks’ interest rates have been quite low in recent times, making these mortgages quite cheap and definitely appealing.

 

So, then, when comparing mortgages how do you know which type is best for you? Really, this depends on the type of person you are and whether or not you like risk. If you won’t be able to sleep at night because the interest rate has fluctuated by half a percentage then variable-rate probably isn’t for you.

But there’s much more to selecting the right mortgage than just choosing the type of rate. You will, for instance, need to consider the amortization period as well as whether or not the mortgage is portable, meaning the balance of your mortgage could be transferred when you move, without you incurring any penalties. What’s more is you should consider the total mortgage cost in relation to your current and projected income, the type of flexibility you’re looking for, among other factors, when choosing a mortgage so that you can avoid paying for any penalties. Don’t forget to account for any and all future financial goals or expenses when determining the size of the mortgage you can afford.

When it comes to comparing mortgages from different lenders, how do you know which is the best for you? The following describes some important mortgage terms that you will need to know in order to more easily navigate your options.

The first thing you will need to decide is whether you’re going to go with a mortgage broker or a mortgage lender. While a mortgage broker will work on your behalf, looking for the best priced mortgage and presenting you with your options, a mortgage lender actually represents a bank or other lending institution from which your mortgage will be given. There are pros and cons to both, mainly that a broker will offer you more options to consider while a lender is the most direct way to access a mortgage, so choose wisely before comparing mortgages.

The second, and perhaps the most important step, is to sit down and assess your finances. Knowing how much you can afford is the best way to ensure you don’t wind up with a mortgage that’s way larger than you can realistically afford. In addition to taking all of your expenses into consideration and weighing them with your monthly income, you will want to save a down payment, work on reducing your existing debt and know your credit score.

The last thing is to go into this process knowing which questions you should ask. One question that far too many first time home buyers fail to ask is what the clauses or contingencies are for the mortgage contract. So, for instance, if you want to be able to have the home inspected before purchasing, you would want to ensure that this is stated in your contract. Another important thing you will need to know beforehand is what additional expenses will be required at the time of closing. While some lenders will add these costs into the loan, others will tack them on later when some homeowners are unprepared and can’t afford to cover the expenses. Lastly, early on you will want to establish with your insurance lender or broker how it is that you should communicate with each other. You’re going to have further questions and there may be things on which they need to keep you updated. Find out how to best stay in touch and in the loop about your mortgage.

Before embarking on your adventure into home ownership, follow these steps to ensure a positive home buying experience. Comparing mortgages takes a bit of time, but it will be well worth it when you find the mortgage that suits your needs perfectly.

Buying a house is a dream for most people and also it is possibly one of the most important financial decisions that a

mortgage interest rates

person has to ever make. Moreover, for a large segment of the population this step requires taking a mortgage because they are not able to afford the entire payment of the house in one go.  According to available data, nearly 75% of Americans take a house on mortgage. A mortgage will probably be the largest amount that a person will ever borrow during their lifetime; therefore it is extremely important to know the various types of mortgage interest rates available so that a person can pick the one which suits their needs.

There are two basic types of mortgage interest rates available – Fixed and variable. Choosing between the various types of mortgage interest rates is not a very simple decision. Ultimately, depending on the risk tolerance levels of the person and the current financial goals in life, one can take a suitable decision on the type of mortgage interest rate to go in for.

The most common type of mortgage interest rate available is the fixed rate mortgage (FRM). In a fixed rate mortgage the interest rate is determined right in the beginning and is fixed for the entire term of the mortgage. The biggest advantage of a fixed rate mortgage is the high level of stability provided by them. Since the exact interest rate is determined before entering into the mortgage agreement, the person knows the exact amount of principal and interest that he will have to shell out during the entire mortgage term. This provides an immense amount of stability and reduces the risk factor. For example, if the money is borrowed at 12% and the interest rate subsequently goes up to 17%, people under the fixed rate mortgage plan will still pay interest at the lower rate of 12%. Therefore, this kind of a mortgage interest rate is most suitable for risk averse people. Moreover, in an economy where the interest rates are predicted to rise in the future, it is better to go in for FRM. However, the person stands to lose out in the event that the interest rates fall during the course of the mortgage term. For example, if the money is borrowed at 12% and the interest rate subsequently falls to 9%, people under the fixed rate mortgage plan will still have to pay interest at the higher rate of 12%. The banks usually charge a 2-3% higher rate of interest for the stability that FRMs bring with them, in order to lower the risk that they face in the event of an interest rate hike. Despite the higher rate and some inherent risks, the popularity of this mortgage interest rate plan can be judged from the fact that over three fourths of American borrowers decide to go in for a FRM because they like the predictability that comes with it.

declining interest rates

A second type of mortgage interest rate is a variable interest rate mortgage where the interest rate charged varies according to market interest rates.  Therefore, the interest rate will keep varying during the term of the mortgage. In order to avoid frequent and large interest rate fluctuations, most variable rate mortgage plans have upper limits as to how much the interest rate can be changed during the adjustment period and over the term of the mortgage. The lenders determine the interest rate for a variable interest mortgage by using a standard index, like the 1,2,3 year treasury rate plus a margin. Generally, people avoid variable interest rate mortgages because of the inherent risk of fluctuating interest rates. However, according to a survey conducted by Freddie Mac in January 2012, which included 125 banks in America, people who choose to go in for a variable interest rate mortgage plan instead of a fixed interest rate mortgage plan will save roughly 105 basis points on their mortgage rate. On an average, the thirty year FRM rate is 3.91% plus points and other costs while the five year adjustable rate mortgage is roughly 2.86%, plus points and other costs. This works out to savings of $698 a year on every $100,000 borrowed under ARM, which is almost 12%.

However, for many people variable interest rate mortgages may be the only choice available since one needs a higher amount of income in order to qualify for a fixed rate mortgage plan. Even so, one must bear in mind that most ARMs offer the option to convert to a fixed interest rate mortgage plan at any point of time during the term of the mortgage.

As mentioned before, choosing between the two mortgage interest rate plans can be quite tricky, therefore we have provided a list of situations where the two types of mortgages will be most suitable.

 

Fixed Interest Rate Mortgage  Variable Interest Rate Mortgage
1. Suitable for people who want to know the exact interest rate in advance.

2. Suitable for risk averse people who wish to know the exact monthly payments that will be needed to be made.

3. Suitable in an economy where market interest rates are expected to rise in the future.

1. Suitable for people who can handle the inherent risk of not knowing the interest rates in advance.

2. Suitable for people who will be able to handle a larger monthly payment, if the market interest rates rise.

3. Suitable in an economy where the market interest rates are expected to fall in the future.

 

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If you are considering a 100 percent Mortgage Loan, there are quite a few things to consider.  It is important to first consider at all sides of this issue.  The banks are beginning to tempt us into buying our dream homes with these very attractive loans.  For the first time since the housing crash of 2008, many banks are beginning to offer these home loans at near-market rates to conventional borrowers.  These are typically people with good credit, but not an abundance of liquid cash flow.  The banks offer no-down-payment deals in an attempt to keep the business of finance moving forward in the face of the ever increasing interest rates.  But, borrowers beware!  You face significant risks, risks about which the banks may not want to warn you!

Similar to the 97 Percent Mortgage Loans that preceded them, the 100 Percent Mortgage Loans carry a wide variety of significant risks.  Because you will have zero equity, you could end up “under water” on your house.  This basically means that your house payments could end up costing you more than your house is worth if property values decrease even minimally over the coming years.  This is something that no one can predict, not even the so-called “economic experts”.  If another economic downturn occurs, this may make it extremely difficult to sell your home.  But, if you are not planning on moving for 8 to 10 years, this may not be a risk at all.  You just have to have a plan.

These 100 percent Mortgage Loans are usually accompanied with only a slight increase in the average mortgage rate, but they also come with a much higher mortgage insurance rate as well.  This has to be calculated into your monthly house payment, something that many people do not consider until it is too late.  All they see is the “American Dream” of home ownership, and forget about the small, fine print.  This leaves little “wiggle room” should something unforeseen happen, like another minor economic slump in the stock markets, property tax increases, or home repairs such as leaky roofs, broken water heaters, or air conditioning repairs.  A Plan (and a Backup Plan) is always a good idea.

 

The Upside of 100 Mortgage Financing

100 percent mortgage

Now that you’ve heard the negative spin, let’s look at why a 100 Percent Mortgage could be GOOD for you.  It is important to hear the “good” with the “bad”, and then make a qualified and informed decision.  All 100 Mortgage financing can’t be bad, right?

Right!  Sometimes they can work in your favor.  To begin with, the Housing Market is still at an all-time low.  That means, reasonably speaking, the only way for it to go is UP!  Makes sense, right?  Well, it could also make “cents”!  That is, as your property appraisals rise, so does your theoretical bank book.  When you eventually sell, you make more money!

So, if you are a young couple, just starting out in life, this may be a good deal for you.  You have decades to recoup the property investment.  I don’t think any of us truly believe that this housing dip can last forever.  And, it certainly seems to have gone down as far as it can already, minus a minor dip her and there.  So, if you budget properly, including all the property taxes, mortgage insurance and home repairs, and still save a little extra for a “rainy day”, why not risk it?

When we are first out of school, earning money, getting married, and having children, it can take years to save up that down payment.  All those years, you are throwing money away renting, when you could be installing equity into a home of your very own.  This is nothing less than “money in the bank”, and an extremely valuable asset to have in your spreadsheet.  First-time home buyers may benefit greatly by 100 Mortgage Financing.

 

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If you are a First-Time Home Buyer, it is important to locate a mortgage broker who specializes in securing the types of loans for

first time home buyer

people like you.  Not all brokers are signed up with these kinds of banks.  Several factors, such as credit rating, personal income, employment longevity and rental history help to determine if you qualify for a 100 Percent Mortgage financing.  Some banks will like you more than others, some will offer different interest rates than others, and still others might offer different types of mortgage structures.  So it is important to throw do your research before you apply.

Although excellent credit is always preferred, there have been times when homeowners have received a loan when they possess a particularly negative blemish on their credit rating.  There are generally two ways to secure a 100 percent mortgage when you have a bit of bad credit on your rap sheet.

A Piggy Back Loan, or what banks call a Second Trust Loan, is a special kind of mortgage.  It may be structured into two separate amounts, perhaps into an 80/20 loan package where they take the overall amount that you wish to borrow and split the financed amount into two separate loans. The first loan is 80 percent of the total amount that you want to borrow, usually used for the long-term mortgage on the home, and the second loan is 20 Percent of the purchase price, perhaps used for the down payment.  The two portions may come from different lenders, will usually have different interest rates and will also have different payoff dates.   The securing of a Piggy Back Loan is dependent on the lender and will vary depending on your debt ratios and special reasons for requesting this type of Loan. Be careful to not exhaust all of your available credit.  Remember to plan!
Then, of course, there is the 100 Percent Mortgage Loan where you borrow all the money in one big lump, from one bank.  This option may be available to you and may be more cost effective. But once again, you have to plan, compare, and shop for the right loan.  As a general rule, most banks will let you borrow up to three times your yearly income as a single adult, or two -and-a-half times your combined income as a couple.  Use these guidelines for what to expect when going into a bank, hat in hand, looking to buy your dream home.  Have realistic expectations.  Do not set yourself up for failure, plan ahead for unexpected circumstances, do your research, and be patient.  That perfect loan will be out there, at the right time, for the right house!  You might be living with this decision for the next 30 years, so you want an end product that you can live with.
So, in the end, it is very worthwhile to spend the extra time looking for the right lender.  Some banks are eager to attract your business by using special promotions, giveaways and deals.  The bank may offer discounts on other services or offer special interest rates, but some banks go farther than others by offering more concrete benefits that can save you money if the unexpected happens and you need legal advice or assistance.  Some lenders agree to help cover the cost of legal fees in certain situations.  Others may agree to waive their standard arrangement fees.  Just watch out for banks who may want to charge you a hidden, additional fee even before you take out the loan!  Read the small print, and, if you are a First Time Home Buyer, you may have more leverage than you think!