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The Best Possible Option
In order to choose and understand the types of Mortgages
available and their existing rates you need to carefully analyze the market. While doing so, you need to evaluate your priorities and economic condition. There are three types of mortgage rates that cover all the plans of any Mortgage Company, though there are some different variants but the underlying principle is same for each one.
- Fixed rate mortgages
(Tenure runs for 15 or 30 years, and in some cases tenures running into 20 and
40-years are also available)
In fixed rate mortgages the interest rate does not change during the tenure of your loan. It implies that the payout per month on account of your mortgage will be fixed over the next 15 - 30 years depending upon the period of your loan. Since fixed rate mortgages are not affected by the fluctuations in the market interest rate, lenders charge a higher interest rate than a short-term loan. So compared to short term loan you eventually pay a large amount as interest. But fixed rate mortgage is a better option for all who have fixed income and don't want to take risk of market rate fluctuations (as in case of Adjustable-rate mortgages).
It is advisable to carry out a detailed market survey before choosing the appropriate mortgage as different financial institutions offer different fixed mortgage rates. It is upto you to choose the tenure of the loan based on your needs and repayment capacity as rate of interest for a 30 year loan is more than say, a 15 year loan tenure.
In case you want to make prepayments ensure to arrange a schedule with the lender so that you are not charged a penalty. The best way to avoid penalties is to make sure that your mortgage loan contract allows you to make prepayments. Initially, in a fixed loan for 15-30 years you mostly pay the interest. It is only by the end of the loan tenure that you start paying off the loan principal.
Homeowners' equity starts
building up as ownership of your home gradually shifts from the lender to you.
- Adjustable-rate Mortgages (ARMs)
(For one, three, five, seven or ten years)
In Adjustable rate mortgages the interest rate fluctuates depending upon the market forces unlike the fixed rate mortgages.
There is an element of risk involved in ARM. Your monthly mortgage payments vary depending upon the changes in the existing interest rates. Initially the ARM loan rates of interest are likely to be less than that of a fixed-rate loan. It is because since the borrower agrees to accept the risk of floating rates during the loan tenure, he or she is rewarded with a lower initial rate. ARMs are classified into two broad categories, with many variations.
- One-year ARM's adjust their rate annually.
(A 30-year loan with an interest rate and monthly payments that
adjust annually.)
- ARM that adjusts according to a schedule agreed upon by you and your
lender. A 3/1 ARM, for example, gives you a fixed interest rate for three years and an annual adjustment thereafter. For example
*10/1 ARM (fixed interest rate for 10 years an annual adjustment thereafter),
*7/1 ARM (fixed interest rate for 7 years an annual adjustment thereafter),
*5/1 ARM (fixed interest rate for 5 years an annual adjustment thereafter),
*6 month ARM (fixed interest rate for six months an annual adjustment thereafter).
There is an inbuilt protection mechanism in ARMs that offers two built-in caps to protect you from enormous increases in monthly payments. A periodic rate cap determines how much your payment can rise at any one point of time. For example, your loan agreement may stipulate that your rate cannot go up more than two percentage points a year. A lifetime cap determines how much the rate can rise over the term of the loan. The same loan that limits increases to two percentage points a year may also impose a six percentage-point cap for the duration of the loan. Such caps can also apply to rate decreases. Therefore, the loan rate may not fall more than two percentage points in a year or six points during its tenure.
One of the advantages of ARMs is that, if you buy your property when the interest rates are relatively high, you can start paying your mortgage with the artificially depressed initial interest rate. And if interest rates start to decline, you can capture the benefits over the next few years.
| Example: $100,000 loan that
will be paid off in 7 years |
10/1 ARM |
7/1 ARM |
5/1 ARM |
3/1 ARM |
| Initial interest rate |
6.875% |
6.750% |
6.625% |
6.250% |
| Initial monthly payment |
$657 |
$649 |
$640 |
$615 |
| Highest possible monthly payment* |
$657 |
$649 |
$896 |
$1,013 |
| Total possible
interest (paid over 7 years*) |
$46,150 |
$45,270 |
$50,402 |
$59,555 |
| *Calculated by assuming
the mortgage payments would reach the interest rate caps in the minimum
number of years. |
CONTINUED
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Servicing
people throughout the U.S. Exclusive hard to find lenders
specializing in unsecured personal loans and bad credit loans.