| Time
spent shopping for a mortgage is time well spent. Before you rule out
one loan or another, give some thought to your particular needs and
wishes. Prequalifying before house hunting puts you ahead of the game.
You already know the standard of mortgages for which you qualify. The
message is simple: Shop for a loan, not a lender. Hunt for the best
loan - interest rate, points, processing costs, etc. Don't pay much
attention to who's originating the loan or where it is.
First,
you should review the major kinds of mortgages you may encounter. This
list doesn't explain them all, but it does contain those you will most
likely see.
Fixed-Rate Mortgage (FRM)
This
is the standard mortgage model. It is the oldest and most easily
understood type of mortgage. Its primary attraction is that the
interest rate and the amount of payment remain fixed for the life of
the loan, typically either 15 or 30 years. However, if rates fall, the
holder cannot benefit from the new, lower rate except by refinancing.
Adjustable-Rate Mortgage (ARM)
With
this kind of mortgage, the interest rate you pay rises and falls along
with other rates charged throughout the economy. Therefore, you, the
borrower, assume the risk of rising rates, and you stand to benefit
should rates fall.
An
essential question to ask about an ARM is whether there are limits on
how much your rate can be raised, both at each review and over the
whole term of the loan. Without limits, known as "caps," you'll have no
way to predict how much your rate (and thus your monthly payments)
might change.
Convertible Option
FRM
and ARM represent the primary options available to home buyers today.
The convertible mortgage represents something of a compromise between
the two. It is designed for those who want the advantages of the ARM,
but also want to limit the risk of rising rates. Under this
arrangement, the buyer starts out with an ARM, but has the option of
converting to a FRM at specified points during the loan term. You may
want to ask the lender these questions: When can you convert? How often
can you consider the option? Are there any up-front fees involved? Will
you have to pay more for an ARM with the conversion feature than for an
ARM without it? Are there additional fees due if and when you decide to
convert? Find out the lender's conversion rate.
Graduated Payment Mortgage (GPM)
A
fixed-rate GPM starts out with low payments, usually below that of a
fixed-rate and possibly that of an ARM, but rise gradually (usually
over five to ten years), then level off for the remaining years of the
loan.
Growing-Equity Mortgage (GEM)
This
option is designed for borrowers who want to pay off their mortgage as
soon as possible. Therefore, the interest rate remains fixed, but the
amount of the monthly payment increases according to a prearranged
schedule, with the higher payments going to reduce the principal
balance. This mortgage can be appealing to someone who is expecting
regular income growth and wants to build equity quickly.
Fifteen-Year Mortgage
Like
the GEM, the fifteen-year mortgage enables borrowers to repay their
loan more quickly, which means they build equity faster and pay less
interest over the life of the mortgage.
Biweekly Mortgage
Another
option for people who want to repay their loans sooner is the biweekly
mortgage. Instead of making a single mortgage payment each month,
borrowers who choose this option make two equal payments monthly.
Federal Housing Administration Insured Loans (FHA)
Should
one fail to pay, FHA insures mortgage loans made by approved lending
institutions. The FHA insures a variety of mortgages, including FRMs,
ARMs, GEMs and GPMs. Down payments are low - 5 percent or less. The FHA
doesn't set the interest rate on loans it insures, so you'll need to
shop around for the best rate.
The
FHA limits the amount it will insure to whichever is less: 95 percent
of the local average home price or 75 percent of the loan limit set by
the Federal Home Loan Mortgage Corporation, a large buyer and reseller
of mortgages.
Veterans Administration Guaranteed Loans (VA)
VA
loans have most of the advantages of FHA loans, and then some, but they
also have eligibility restrictions. They are available only to veterans
of the armed services, those currently in the service and their
spouses. VA loans are typically half a percent or more below market
rates, and they can be obtained with no money down.
|
